As you enter retirement, you may be considering options that will give you financial peace of mind in the coming years. With a reverse mortgage from NEO Home Loans, you can convert a portion of your home equity into usable funds - WITHOUT having to make monthly mortgage payments.Schedule a Consultation
It’s true that historically this loan has been used as a loan of last resort, mainly by people who are desperate and out of options. Ironically, this is the group that benefits the least from a reverse mortgage. In reality, the more money you make during retirement, and the more retirement assets you have, the greater the probability that a HECM reverse mortgage can benefit you.
Think about this for a moment, when you are retired, the income you draw from your retirement accounts is in most cases taxable income. The more you draw, the higher your tax bracket, which results in a greater attrition of your retirement and estate assets. Paying taxes on every dollar you draw on to survive in retirement is very inefficient. So why does virtually everyone do it?
What if you could reduce the amount of income you would need from your retirement accounts, thus reducing your tax rate and preserving your asset base? A HECM reverse mortgage not only eliminates your monthly mortgage payments for as long as you and your spouse live, but it can also provide you either with a steady stream of tax-free monthly deposits into your checking account or a tax-free line of credit you can use whenever you need. Sure, you are giving up the equity from your home, but you are using it to preserve the rest of your assets and to avoid paying Uncle Sam at the same time.
What would happen to your other assets during retirement if they were allowed to continue compounding while most of your living expenses were covered by a HECM reverse mortgage? How would you and your heirs benefit if your need to draw on these other assets was postponed by another 5 or even 10 years? For example, if you could postpone drawing your Social Security benefits for just 5 years, how much more would you recoup in increased benefits over the next 10 to 20 years of your life? This is only one of the advantages this program offers the more affluent.
Well that may be true, but you don’t need a Porsche, a boat, a motorcycle or second home either. But if they fit with your financial resources and goals, they can sure make your life more enjoyable.
The same is true with a reverse mortgage. You may not “need” one, but do you really want to leave money on the table that could go to your heirs? Or that could be given to your favorite philanthropic endeavors? Or perhaps even be used to extend your retirement portfolio in case you live to be 108?
You likely feel that you’re all set and that you don’t need any of the benefits that a reverse mortgage can offer. That may well be true for now. But what if things change? What if something goes terribly wrong? What if we see another Great Recession, or worse, another Great Depression? What would happen to your retirement lifespan projections if the market takes a 20 or 30% hit? What if you are forced to sell your hard-earned retirement assets while prices are down, potentially way down? What would you do if your stocks and bonds lost 30, 40, 50, or even 60% of their value? Chances are, you would be doing a lot of thinking about life and money, and which one you would rather run out of first.
“Buy low, sell high” is good advice in any stage of life. But when you are retired and your resources and ability to create income are comparatively limited, that principle becomes paramount. Stock values today are near all-time highs, nothing to worry about. But it would be foolhardy to think they’ll always be this way. Prudence dictates that you hedge your bets and insure yourself against an economic downturn. A reverse mortgage is one of the best ways to do that. It provides you with another liquid asset base to draw on, especially during down periods when you want to hold on to your other assets and avoid having to liquidate them at rock bottom prices. An HECM reverse mortgage can be a defacto insurance policy to help you ride out those bear markets until they return to bullish territory.
Not really. Most parents want to pass their home on to their children when they die. This is a noble, responsible, and admirable instinct. But is it practical? Picture your home shortly after the death of its last living owner (you or your spouse). Do you see a moving truck arriving out front with the kids and grandkids moving in? Can you imagine your son or daughter moving into your master bedroom? Can you picture the paint crews arriving, cabinetry folks measuring, and a new hot tub being delivered? Not likely.
What is going to happen then? It’s more than likely that a Realtor® will come and pound a sign in the front yard and shortly thereafter your address will start showing up on Zillow. In other words, if you look at it rationally (and without any sentiment that might cloud your view), the truth is that in most cases the kids and grandkids will be more interested in having the cash than the house. That might not be true for everyone. But if it’s true for you and your heirs, won’t everybody be better off if you adopt a strategy that maximizes the amount of cash you can leave, while allowing you and your spouse to live in the home without mortgage payments as long as you reside in the home and pay for property taxes, homeowners insurance and maintenance costs?
This is simply not true. You do not convey title to anyone else when you take out a reverse mortgage. You retain the same rights you have now. You will still be free to do whatever you want with your home, even to sell it or refinance the mortgage. You keep all the same liberties you have today. In fact, if you think about it, a reverse mortgage could even give you more.
Consider this: if you retire with a regular forward mortgage on your house and then something happens so you can’t make the payments, you will lose your home, won’t you? With a reverse mortgage, you won’t have to worry about that. You are set free from ever having to make another mortgage payment and free from the fear of ever losing your home to the bank. You are required to pay property taxes, insurance, to maintain the property and to live in the home as your primary residence. You would have to do these things with a forward mortgage as well but the costs of these items are easier to bear when you no longer have any monthly mortgage payments to make.
Doesn’t my home need to be debt free to qualify for a reverse mortgage? Not true! Even if you are making payments on a forward mortgage right now, you are most likely eligible for a reverse mortgage as long as you are at least 62 years old and have 50% equity or more in your home. You can borrow up to the Initial Principal Limit, which is calculated based on your age and the current home value. The funds you receive can be used to pay off an existing mortgage, to consolidate debts, to create a stream of regular monthly payments into your checking account, or simply to establish a line of credit which you can draw upon whenever you choose.
Can I use a reverse mortgage to buy a home? Yes, you can! Let’s say you wanted to move to Arizona. You could put 50% down on a house there and never make another payment again for the rest of your life. Great plan! Just think how much less you will need to draw out of your retirement accounts for living expenses when you have no mortgage payment to make. If you are 62 or older and have 50% equity or more in your home, you’re likely eligible to qualify for an HEMC reverse mortgage that can free you from ever having to make a mortgage payment for the rest of your life. *Payment of taxes, insurance and maintenance is required. Must live in home as primary residence.
No, only renters can be evicted. You and your spouse are homeowners, not renters. But unlike most homeowners, you can’t be foreclosed on for failing to make payments since there are no payments for you to miss. (That assumes, of course, that you pay your taxes and insurance and maintain the home.) So, no matter which one of you survives the other, the remaining party can still live in the home, mortgage free, until he or she either passes away or moves out of the home as a primary residence.
What happens then? A reverse mortgage comes to maturity when the last of the qualifying owners, you or your spouse, dies or moves out of the house so it is no longer your primary residence. At that point, your estate and/or your heirs will decide what to do with the home. Typically, they will have up to a year after the death of the last surviving spouse to settle the terms of the reverse mortgage. If there is equity in the home, they will sell it and take the equity. On the other hand, if the value of the home at that point is less than the amount paid out on the reverse mortgage, (in other words, if the home is upside down) they will just walk away.
You’re probably thinking: “What?!? How is that possible?!? Don’t they have to pay the difference?” No, they don’t, and here’s why…
A reverse mortgage is a “non-recourse” loan. This means that the home itself acts as the guarantor of the loan, and the only recourse for collecting the debt is the home value, even if it is less than the amount of the debt. In other words, since no one can be held personally liable for the debt, neither you nor your spouse as co-borrower, and not even your estate or your heirs may never be forced to pay a loan amount that is greater than the home.
If this idea sounds strange to you, consider the fact that most commercial real estate is financed with non-recourse loans. Commercial investors insist on non-recourse loans whenever possible because it limits their personal risk while maintaining their ownership interest. You get the same benefit when you take out a reverse mortgage.
One more thing that is somewhat counter intuitive, but vital for you to understand. If your home is upside down in a reverse mortgage at the time you and your spouse are both gone, that’s good news and your heirs should thank you. Here’s why: It means that during your life you covered your living expenses with tax-free money from your HECM reverse mortgage instead of paying them with taxable distributions from your retirement accounts. That means that funds came out of your retirement accounts at a much slower pace and presumably a lower tax bracket. Losing less money to taxes and leaving more in your retirement accounts (to compound for a longer period) means there would be a whole lot more left to pass on to your heirs or to other worthy causes when you die. Isn’t that what we all want?
Your equity won’t go to the bank, it will remain yours, but in a potentially more useful form. The whole purpose of a Home Equity Conversion Mortgage (HECM) is to convert your home equity into a combination of assets: a guaranteed life interest in the home for you and your spouse -- so you can use it for the remainder of your lives, without any worry of foreclosure -- PLUS an amount of money that you can use however you choose, whether in the form of a lump sum, monthly tax-free income, or a revolving line of credit. This by the way, is where the reverse mortgage gets almost too good to be true, so make sure you grasp how advantageous this can be.
When setting up your reverse mortgage, an Initial Principal Limit calculation will be done based on your age and the current home value. For example, let’s say you are 62 years old and your home is valued at $600k. The Initial Principal Limit would be approximately 50% of your current home value, or about $300k. That’s the amount you can borrow, and you can use it in any way you want. You could pay off an existing mortgage or any other high-interest debt. You could put the money into investments, buy a second home close to the kids or purchase anything else you want with it. If you’d rather have a steady income, you could choose to have your money in tax-free monthly distributions instead of a lump sum.
On the other hand, if you really don’t need the money at the time you open the reverse mortgage, you could choose instead to set it up as a revolving line of credit, available for you to use whenever a time comes that you do need it. If a need arises, you draw the amount you want into your checking account. If you would like, you could make payments to reduce the line of credit, just like a credit card or any other line of credit. However, what makes this option really attractive is that this line of credit that will grow at the rate of interest on the loan, regardless of your loan balance, for life.
Why is that important? Think about this; what could you do with a line of credit that will grow at 5 or 6% per year for the rest of your life? That expansion in the credit line could be utilized to offset any increasing interest that might accrue on any amount you draw. Or, if you are not utilizing the full balance, you could just keep it as a piggy bank of credit, waiting for a time when you need it, but will keep growing until the last remaining spouse passes away or moves out of the home. Do you have any other asset that will grow at 5 or 6% regardless of market conditions until both you and your spouse have passed away?
It gets even better than that. Let’s suppose, that at some point down the road your line of credit has grown to $900k but your home is only worth $800k. Remember what we said about a reverse mortgage being non-recourse? The lower value of the home has no impact on your use of the full line of credit. You can draw the full $900k and deposit it in your checking account or use it in any way you choose. Your home is on the hook for that $900k, not you. If it ever happens that the balance of your line of credit is more than the value of your home, there will be no financial hit to you, your heirs, or your estate.
This is one of the biggest and most widespread misconceptions about home ownership. An unencumbered asset that is easily searched on public records is anything but safe! In today’s lawsuit-happy society, owning a home free and clear is like painting a big bullseye on your back and saying, “Sue me!” An asset like that is the first thing that an attorney will look for if they are considering taking on a case against you. Homes are recorded in every county as public record. About ten minutes on the county recorder’s website and a quick peek at Zillow will be enough to give anyone an idea as to how much equity there is to go after.
The idea that you should pay off your mortgage (and as soon as possible) is a “sacred cow” born out of the Great Depression, when a lot of people lost their homes because they couldn’t make the payments. Widespread fears of losing your home to the bank have been re-kindled by the recent Great Recession, when banks foreclosed on many thousands of homes. But keep in mind that these foreclosures were almost all associated with forward mortgages. With a reverse mortgage, there are no recurring payments to make or miss. As long as you pay your taxes and insurance, maintain the property and continue living in it, you have no way of being foreclosed upon. Plus, with a reverse mortgage recorded against title, even if the current balance on the line of credit was zero, it’s no longer an easy mark for potential lawsuits because the full amount of the line of credit is recorded and most would assume there is a full balance owing.
*This advertisement does not constitute tax and financial planning advice. Please consult a tax advisor and financial planner regarding your specific situation.
While it’s most likely true that you’ll have to pay taxes on your retirement income, a reverse mortgage may still allow you to pay less in taxes than you would otherwise.
Let’s look at an example of the kind of tax efficiency a reverse mortgage can provide. Imagine that you opened a reverse mortgage on your 62nd birthday so you would never have to make another mortgage payment as long as you lived in the home. Let’s assume that your Initial Principal Limit amount was $300k and that you had a small balance remaining on your home mortgage at the time, maybe $100k or so. That left you roughly $200k to draw upon. Let’s assume you established a line of credit and made deposits from the line of credit into your checking account of about $1,500 each month. Keep in mind that even though you would accrue interest on these withdrawals, the line of credit will grow for life at that same rate of interest.
Eight years later, you turn 70. Because you have supplemented your income with your line of credit for the last 8 years and have not made a mortgage payment since you turned 62, you haven’t had to draw much out of your retirement account. That has allowed your retirement assets to compound and grow to a much larger balance than they would have if you had been drawing on those assets (and paying the additional taxes) to live on. So far you are doing pretty well!
A few months later, you turn 70½, and now you have a problem. The IRS requires that you start taking RMDs (Required Minimum Distributions) from your retirement accounts beginning on the next April 1st. Distributions from retirement accounts (other than Roth IRAs) generally result in taxable income. The IRS calculates the amount of your RMD based on the account balance and your age. The higher your retirement account balance, the greater the amount of your Required Minimum Distribution.
Because you don’t have a house payment, you probably don’t need the additional income. But the IRS says you have to take it anyway, whether you need it or not -- along with the tax hit that comes with it – or pay an additional 50% penalty. To make matters worse, this unavoidable increase in your taxable income happens at a time when you don’t have as many deductions to offset the additional income. So, what do you do? If you don’t really need that money to live on, is there something smart you can do with it?
Here’s one solution: to reduce the impact of that inevitable tax hit, use the RMD money to pay down the balance on your reverse mortgage. Why? Because, any elective payment made on a reverse mortgage goes first toward accrued interest. This benefits you in two ways: any portion of your payment applied to interest (which is usually sizeable) results in a tax deduction for you, with the potential to offset a significant portion of your taxable income. At the same time, any payment made towards either interest or principle increases the available amount available for you to draw at a future date.
Let’s take a closer look at how this could work. Let’s say you accumulated $80k worth of deferred interest during that nearly 9-year period (from your 62nd birthday to sometime after age 70½) of utilizing your line of credit and not making mortgage payments. You make an $80k payment, which goes towards paying the accrued interest. This gives you an $80k mortgage tax deduction to offset some of that RMD that just kicked in. (Check with your CPA to make sure this would work for your situation.)
It gets even better. Let’s assume that this year all you need is a $30k tax deduction to drop you into the next lower tax bracket. So your CPA gives you the go ahead to write a check to pay $30k in deferred interest on or before December 31st. Then January comes, and it’s your 50th wedding anniversary. You want to go big for this one. Simply request a withdrawal from your reverse mortgage line of credit and within a week that $30k is back in your checking account tax-free. Now THAT is tax efficiency! Awesome, isn’t it?
*This advertisement does not constitute tax and financial planning advice. Please consult a tax advisor and financial planner regarding your specific situation.