Many Americans don’t have enough money saved to see them through retirement. According to the 2019 Planning & Progress Study from Northwestern Mutual, 46% of Americans expect to work past the traditional retirement age of 65, and 56% don't expect Social Security to cover all their needs in retirement.
Are You Ready for Retirement?
Planning for retirement can feel overwhelming, especially if you feel that you haven’t saved enough. Experts say that you should plan on spending about 75% of your annual pre-retirement income each year after you retire. But everyone is different, and you might find that you need more or less money, depending on how you spend your time after you retire.
If you want to discuss your options, talk with one of our retirement experts at VyStar Investment Services. The key is to put a plan into action as soon as possible, because retirement has a way of creeping up on us.
What Is a Reverse Mortgage?
If you don’t have enough savings for retirement, a reverse mortgage could give you the cash you need.
With a reverse mortgage, instead of paying a lender every month to buy your house over time, the lender takes part of the equity out of your home each month and sends you the cash. Essentially, you borrow against your home equity and use the money as needed. After you die, the property is sold, the loan is repaid, and any remaining money passes on to your heirs.
There are three types of reverse mortgages:
Single-Purpose Reverse Mortgages are offered by some state and local government agencies or non-profits.
Proprietary Reverse Mortgages are loans from private lenders.
Home Equity Conversion Mortgage (HECMs) are federally insured reverse mortgages.
What Are the Rules for Reverse Mortgages?
You must be 62 or older to apply for a Reverse Mortgage or HECM. The payments are usually tax-free and generally won’t affect your Social Security or Medicare benefits.
In exchange for the funds, you will be responsible for several things:
You must maintain adequate homeowner’s insurance, and in some cases, flood insurance may be required as well.
You must pay your property taxes.
You must maintain the property itself.
The money you receive can be used for any purpose, from home improvement or travel to paying monthly bills and medical expenses.
How Much Can You Borrow?
The total amount you can borrow is called the principal limit. This limit is determined by factors like your age, the value of your home, the amount of equity in your home, and current interest rates. Keep in mind that the principal limit will always be significantly less than the total value of your home.
For example, if your home is valued at $400,000 and your current mortgage balance is $140,000, that means you have $260,000 in equity in your home. In this case, you would never be able to borrow more than $260,000, and in most cases, your principal limit would be less than that.
What Are the Rates and Fees?
There are often fees and costs associated with a reverse mortgage, such as origination fees, closing costs and servicing fees. You may also need to pay mortgage insurance premiums for HECMs.
Most reverse mortgages have variable interest rates, which means that the rate can change over time. Fixed rates may also be available in some cases.
How Do You Get the Money?
You may be able to receive the funds in several different ways:
A single payment
A term-fixed amount for a specific length of time
Tenure-fixed amounts for as long as you live in your home
A Line of Credit (LOC) that you can access when you need it
Is a Reverse Mortgage Always a Good Idea?
Reverse mortgages work well for some people, but they may not be the best solution for every situation. In some cases, selling your existing home and downsizing may give you enough money to live the life you want. In the worst-case scenario, you could lose your home with a reverse mortgage, so it pays to do your research.
Don’t be pushed into a situation that makes you uncomfortable. You should shop around for the best deal, and remember that most reverse mortgages will allow you three business days after closing to cancel the deal for any reason, without penalty. This is called the right of rescission.
If you’re not sure what’s right for you, you’re welcome to discuss your situation with one of our specialists at VyStar Investment Services. We can help you understand your options and obligations so you can make an informed choice.
Learn More About Reverse Mortgages
To learn more about reverse mortgages and how they work, take a look at these online resources:
Home Equity Conversion Mortgages (from the U.S. Department of Housing and Urban Development)
Reverse Mortgages (from the Federal Trade Commission)
Reverse Mortgage Loans (from the Consumer Financial Protection Bureau)