By: Preston Mangus
To put it bluntly, we are not saving enough money for our own futures. There are many possible reasons for this, including high expenses, inadequate wage income, poor decisions and excessive debt. The fact is most Americans are not financially prepared for their golden years: According to the National Institute on Retirement Security, almost 40 million households have no retirement account savings at all. So what is one to do?
First, it is never too early or too late to save for retirement! Conventional wisdom dictates that we should be putting away 10 to 15% of our salary each year. Take advantage of catch-up retirement contribution opportunities when you can. Further, you should plan on spending the equivalent of around 75% of your per-retirement annual income for annual expenses during retirement. VyStar Investment Services experts can put you on a path that can help you meet your retirement needs. The key is to put a plan into action as soon as possible; retirement has a way of creeping up on us.
Although most Americans’ liquid net worth numbers fall short, there is a bright spot: home equity, (i.e., the current appraised value of a home minus any outstanding mortgage balance). For example, a current home valued at $400,000 with a mortgage balance of $140,000 equals $260,000 in equity. For many, contacting a VyStar Home Loan Advisor can be an option to access this equity as needed through a Home Equity Loan or Line of Credit. For older members, a Reverse Mortgage or Home Equity Conversion Mortgage (HECM) may be another solution.
The basic theory is fairly simple: You borrow against your home equity and use the funds as needed. After you pass away, the property is sold, the loan is repaid, and any money remaining passes on to your heirs.
You must be 62 or older to obtain this type of mortgage. As the name implies, instead of paying a lender every month to buy your house over time, a reverse mortgage takes part of the equity in your home and converts it into payments to you. It’s like an advance payment on your home equity, and the payments are usually tax-free and generally won’t affect your Social Security or Medicare benefits.
The amount you can borrow is called the “principal limit.” This limit will be determined by multiple factors, like age of borrower(s), home value/equity, and applicable interest rates. It will always be significantly less than the total value of the home.
There are three types of reverse mortgages:
There will be fees and costs associated with the mortgage—potentially origination fees, closing costs and servicing fees—as well as possible mortgage insurance premiums for HECMs. Most reverse mortgages have variable rates, and can change. Fixed rates may be available with additional conditions. The money received can be used for any purposes you see fit: home improvement, medical expenses, travel, etc. You might even pay off any existing mortgage balance, if it’s within the principal limit.
Funds can be accessed in several different ways:
reverse mortgage is a viable option for many, but it is a complicated arrangement—you could potentially lose your home. In fact, the reverse mortgage may not be the best solution for every situation. Oftentimes, selling an existing home and downsizing may provide enough savings to fill the income gap. A reverse mortgage can be the right solution in the right circumstance, but it should be thoroughly researched and understood, probably with an outside financial opinion.
Don’t be pushed into a situation that makes you uncomfortable. You should shop around for your best deal, and remember that most reverse mortgages will allow you three business days after closing (right of rescission) to cancel the deal for any reason without penalty.
Reviewing your case with a VyStar Investment Services specialist could be time well spent to understand your options and obligations.
The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. VyStar Credit Union disclaims any liability for decisions you make based on the information provided.