Unlock the Value of Your Home to Fund a Better Retirement
Strapped for cash? With the cost of food, gas, and healthcare going up, you might be running out of savings sooner rather than later. However, if you own your own home, there’s some good news. You might be able to pull money out of your home equity to pay off bills, high-interest credit card debt, home repair, or even a much-needed vacation.
What Is a Home Equity Conversion Mortgage (HECM)?
The best part about it is you don’t have to pay it back! It’s called a home equity conversion mortgage (HECM), which is essentially a reverse mortgage backed by the Federal Housing Administration. The organization is federally insured by HUD; the agency guarantees the lender will be repaid.
Are You Eligible for a Reverse Mortgage?
There are two main requirements for qualifying for an HECM: (1) You must be at least 62 years old; and (2) you must occupy your home as your primary residence (not as an investment or a vacation home). You will have to get a counseling session with a HUD-approved reverse mortgage counselor. They’ll explain the program and the fact that your heirs will have to pay it back when you pass away.
How You Can Use the Money
Proceeds are payable either as a single lump sum or in variable options, typically a monthly disbursement or a line of credit. You may spend them however you like, for either urgent or more discretionary spending. You might need to cover an unexpected job loss or health issues, pay off an existing mortgage, or simply choose to spend on travel, entertainment or home improvements. Wealthier retirees sometimes elect to diversify their portfolios with the added income stream.
Benefits of a Reverse Mortgage for Seniors
An HECM offers some compelling advantages if your circumstances fit:
- You can plan on staying in your “forever” home, where you are settled, and can perhaps renovate it, allowing you to age in place.
- You can enjoy a reliable cash flow to provide more comfortable senior years.
- You need not make monthly payments on the loan balance.
- Your spouse can usually remain in the home even if you die or move to another accommodation.
- You can pay off debt balances, such as medical bills.
- You can use the proceeds to pay off existing mortgages and thereby prevent foreclosures.
- You can avoid paying withdrawal penalties on other retirement accounts.
- You can fund a grandchild’s education or any other meaningful purpose.
Risks and Drawbacks to Consider Carefully
There are, however, several significant drawbacks, so seniors must take extra care with such an important decision:
- Fees tend to be high, including up-front financed origination charges of about 2% and around .5% for annual review of mortgage insurance premiums.
- You could compromise your benefits from needs-based programs, such as Medi-Cal.
- You could inadvertently default by failing to meet loan requirements, including by living outside the home most of the year, neglecting property taxes or home insurance, or not making maintenance repairs. An unresolved default might lead to eviction and foreclosure.
Other Loan Options to Explore
Alternative loans may be more appropriate. For example, those under age 62 could use home equity loans (HELOCs). More expensive properties may require a jumbo reverse mortgage, with higher interest rates but no mortgage insurance. By contrast, single-purpose reverse mortgages are cheapest and can be used for specified expenses such as taxes or repairs.
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