One of the key financial planning tips for seniors is to pay off your home before you retire. First and foremost, this gives you the comfort of knowing you can afford to live in your home indefinitely. Having a safe place to live during retirement removes a big worry.
Not only does your home provide a great place to live, but it also provides a backup source of money. Generally, I encourage people to stay in their homes until they can no longer care for themselves. At that point, the proceeds from the sale of the home can provide the resources to pay for living in assisted living or a nursing home for several years.
It isn’t unusual, however, for couples or individuals in retirement to run out of cash before they run out of health. Picture yourself in your seventies out of cash. If you own your home and are still comfortable living there, a reverse mortgage may allow you to stay in your home with the resources you need to live there comfortably for the rest of your life.
A reverse mortgage is rather like what it sounds like. It is a mortgage that pays you instead of being a mortgage that you pay. It is, however, still a lien against your property. When the home is sold either by you or your heirs the mortgage balance will have to be paid from the proceeds. In rare cases, for instance when someone lives in the home for an unusually long time after taking out the mortgage (picture someone living to 105 in good health) all of the equity in the home could be lost to the mortgage. In that regard, it is a bit like selling the home a little bit at a time while you continue to live in it.
The Department of Housing and Urban Development offers a reverse mortgage program called the Home Equity Conversion Mortgage for Seniors (HECM). There are private alternatives to this, but caution should be used whenever considering a reverse mortgage that isn’t part of the HUD program. There are also a few state programs, typically for restricted purposes and available only to low income borrowers, that may be appropriate in some cases.
The HECM program offers mortgages with four different structures:
- Equal payments for life: With the equal payments for life option, you will receive relatively small payments, but they will be guaranteed to continue as long as you live in the house. Essentially, the lender is betting that you will pass away or be forced by your health to move out before the loan balance with accumulated interest exceeds the value of the property.
- Equal payments for a fixed term: You also have the option to choose to receive money each month only for a fixed period of time. In this case, you’re betting that you will pass away or be forced by your health to move out before the end of the term you’ve chosen.
- Credit line: You also have the option to obtain a traditional credit line for a fixed amount that you can draw upon at any time for any reason. This could be a good option if your only need for the money is to do the maintenance and upkeep on your home. If your savings won’t cover a new roof, but your income is adequate for your normal monthly expenses this plan could be a good option.
- Combination of equal payments plus a credit line. You can also choose a to get a credit line and an equal payment stream for either a fixed term or for the rest of your life.
One of the key things to know about a reverse mortgage is that the cost to originate the loan is fairly significant. It would be difficult to obtain a reverse mortgage under the HECM program for less than $10,000. This money will come from the loan proceeds and not out of your pocket, but the money is still gone from your estate.
The key implication of the cost is that if you are already failing in health and anticipate needing to be in an assisted living or nursing home environment within 24 months, you may be better off to sell your home, downsize your belongings and make the move to an affordable apartment until you need more help to live. (Of course, if you don’t need money, you not only don’t need to sell your home you don’t need a reverse mortgage.)
There is some fraud and abuse in the reverse mortgage world. One key protection for you is that if you ever agree to a reverse mortgage, you have a three day right to cancel the transaction and pay nothing. It will be as if it never happened. You should visit the Federal Trade Commission’s web page about using caution when obtaining a reverse mortgage before you get one.
Because you are required to live in the home after you obtain the reverse mortage it probably doesn’t make sense to take out a reverse mortgage while you are young and healthy enough to serve a mission as it may interfere with your ability to maintain your standard of living after you return if you are forced to sell your home.
Once you take out a reverse mortgage, no matter which option you originally chose, you can never be forced out of your home. No matter how long you live, no matter the interest rate, no matter how good or bad the real estate market is, you cannot be forced from your home unless you fail to pay the taxes, the insurance or fail to maintain the home properly.
As a general rule, a reverse mortgage seems to make the most sense for healthy retirees in their mid-seventies, after their years of mission service have passed. If you are healthy at that age and need money, you may be able to collect the monthly payments and live in your home for many years. The biggest risk that remains is that if you live for an unusual length of time-say into your mid-nineties-before you are forced to move from your home, you could find that the equity in your home is gone and that your home will provide no help in financing nursing home care. At that point, you would be forced to rely on Medicaid. With today’s health care system in America, there is virtually no risk of ending up on the street.
So, we end where we begin. In order to have the option to take out a reverse mortgage, you have to own your home with little or no debt attached. It should be your top financial objective for your family and for your retirement to own a home and pay off the mortgage before you retire.
My book, Building Wealth for Building the Kingdom addresses these and other financial topics; you can connect with me on my blog at BuildingWealthForBuildingTheKingdom.com, on Twitter or Facebook. Be sure to share your experien
ldsseniorJune 3, 2015
I think of this as a true last resort. The high interest rate is usually not thought of, but it quickly eats away at home equity. The high origination fees instantly take a large chunk of equity and then of course there is the church's long standing doctrine of "GET OUT OF DEBT AND STAY OUT OF DEBT!". A reverse mortgage is still a debt. Many seniors lost their equity in a down market and when they also lost good health, they had nothing left to pay outstanding medical bills and for quality assisted living. In seeking to maintain an artificially high lifestyle, they took the risk that they would be thrown into the worst conditions when their health tanked at the same time that the market tanked. It was sad, but we can learn from it..
DianneFebruary 12, 2013
Thanks for such an informative article. I can see my options more clearly now.