Concerned about the health of your retirement nest egg?
Even if you’ve managed to save a significant sum for your years after work, it might not be enough to cover the expenses today’s retirees face.
The cost of health care alone is a huge sum of money, with some financial experts predicting that couples retiring today can expect to pay $275,000 toward this expense from now until the end of their lives.
It’s overwhelming to think about, especially if you’re already unsure of how you’ll manage costs and pay for your needs out of your nest egg.
But before you panic, know that there may be other ways to fund your life as a retiree. One option could be to tap into your home equity to pay for health care, living costs, and more in retirement.
How Your Home Equity Can Help You Cover Costs in Retirement
The Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage because it’s insured by the federal government and offers certain protections to the borrowers.
The HECM was created by Congress in 1987. Since then, some seniors have taken advantage of the product to supplement their retirement income from investments and Social Security.
But when the housing bubble burst in the late 2000s and the economy tanked as a result, some retirees had a difficult time keeping up with their tax and insurance payments.
As a result, the reverse mortgage lender foreclosed on their homes. At the time, there was no requirement for lenders to assess the borrower’s ability to make those payments, so the default risk was high.
What’s more, there were few protections for the non-borrowing spouse when the borrower died. Adding insult to injury, spouses of the recently deceased were often forced to either refinance the loan or sell the house to pay it back.
New Protections for Reverse Mortgage Borrowers
That’s why reverse mortgages haven’t always been seen as a reliable component of retirement planning. They can be expensive and full of pitfalls if you’re not careful.
But things started to change in 2015, when the U.S. Department of Housing and Urban Development passed two new rules intended to offer more protections to seniors.
The first rule required lenders to do a financial assessment of borrowers before extending an HECM loan. This helps ensure those borrowers they can make payments for property taxes and insurance.
Lenders are also now required to give eligible non-borrowing spouses a deferral period after the borrower’s death. During this period, the spouse can stay in the home as long as he or she continues to meet the obligations of the HECM.
The Pros and Cons of Using Your Home Equity for a Reverse Mortgage
Reverse mortgage proceeds come in one of three forms: a lump sum, fixed monthly payments or a line of credit. In some instances, you can even create a combination of the three payment options.
Even if you’re early on in retirement and have sufficient funds, the line of credit option might be a good way to plan for later. That’s because the unused portion of the credit line grows at a rate equal to the compound rate of the loan.
But there are some potential downsides to understand, and it’s important to know that a reverse mortgage is not the end-all, be-all solution as a source of funds for retirement costs.
For starters, reverse mortgages carry high origination and servicing fees. Borrowers must have enough cash upfront to afford one. And if you run out of cash even with the payments from the loan, you can lose your home if you’re not current on your insurance and tax payments.
The financial assessment is meant to help resolve these concerns, but you can’t predict the future It’s possible that something can come up that makes it harder to control your cash flow.
Your home must also remain occupied throughout the loan’s term. So, if you enter an assisted living center or you have an extended stay in the hospital, you could lose the home even if your non-borrowing spouse is still living there.
What About Alternatives to Reverse Mortgages?
A reverse mortgage isn’t the only way retirees can get the cash they need. A home equity loan or line of credit is one way to get some funds without the stringent rules of a reverse mortgage.
A homeownership investment program is another way to deal with the costs of retirement. Companies like Unison offer this as a way to get cash for retirement without taking on extra debt or having to make payments.
It’s a different way to utilize your home equity to pay for retirement and health care costs without the same risks that come with something like a reverse mortgage.
Unison provides you with cash upfront, up to 20 percent of the current market value of your home. In return, the company gets shares in the appreciation of your home when you sell it in the future.
Instead of a loan, it’s a way to allow a third-party to invest with you.
Picking the Right Option
If you’re confident in your ability to cover retirement costs now and in the future, a reverse mortgage likely isn’t for you. It’s also not a good option if you’re not confident in your ability to cover the mandatory expenses, payments, and fees that come with a reverse mortgage.
If you’re house-rich and cash-poor, however, a homeownership investment program can be an option to boost your cash reserves to cover immediate costs like healthcare and other concerns you have in retirement.
Take the time to consider it and the alternatives to see if it can work in your favor.
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