How to Use Home Equity to Empower Your Retirement

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How to Use Home Equity to Empower Your Retirement 

(Reprinted with permission from Finance of America, one of our trusted lending partners)

When you decide to retire, you’ll need to determine how much money it will take to live comfortably and remain financially sound. Social Security and retirement investments such as a 401(k) or IRA can help, but there may be times when you need more income. One often overlooked source of income is your home equity.

What Is Home Equity?

Home equity is the difference between the balance on your mortgage and your home’s current market value. For example, if you owe $90,000 on your home loan and your property is worth $350,000, your home has $260,000 of equity.

Equity can fluctuate based on the market. In a seller’s market, you may have more equity than in a buyer’s market. A real estate appraiser can provide you with an official valuation based on comparable home sales in your area. You can also get a general idea by reviewing real estate websites and searching for recently sold properties similar to yours in location, size, and age.

How to Turn Home Equity into Cash

Once you know how much equity you have, there are several ways to turn it into cash.
Home equity loan or line of credit

A home equity loan generally offers a fixed amount of credit and interest rate that you repay over a set period of time, usually ranging from five to 15 years. A home equity line of credit is a revolving balance that can be drawn from when needed. Similar to a credit card, you make payments on the amount you borrow.

Cash-out refinance. 

You can also draw on your home’s equity by doing a cash-out refinance. In this case, you refinance your mortgage for more than its current balance, taking the cash difference.

Reverse mortgage.

Another option for tapping into the equity in your home is generally available to homeowners 62 years or older. With a reverse mortgage, the lender makes payments to the borrower—the reverse of a traditional mortgage. The homeowner isn’t required to pay back the loan as long as it remains their primary residence, provided the borrower continues to meet all loan obligations, such as paying property taxes, fees, and hazard insurance, and maintaining the home. If the homeowner fails to meet these or other loan obligations, the loan will need to be repaid.

Downsizing. 
You may decide your home is too large for your retired lifestyle or that you no longer need to live in an expensive area. You could sell your home and buy a smaller, less expensive place. This would allow you to keep some of the equity you had built.

Pros and Cons of Tapping Home Equity

  1. Using your home equity can offer advantages, depending on the method you choose. Reverse mortgages, for example, allow you to tap into your equity while staying put and retaining ownership. And downsizing often comes with lower maintenance costs and work, and you won’t have to take on additional debt.
  2. However, there are downsides. If you choose a new loan product, such as a home equity loan or line of credit or a cash-out refinance, you are taking on additional debt requiring monthly or another periodic repayment. This may not be the best choice if your income will be significantly reduced due to retirement. And while downsizing has its advantages, you’ll have to move, which can be emotional as well as costly.
  3. There is no one-size-fits-all way to use your home equity for retirement. The best option for you will depend on your personal situation. Speak with a financial expert and take time to carefully consider each option to make the right choice for you.
  4. This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
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Using a Reverse Mortgage to Buy a House

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Using a Reverse Mortgage to Buy a House

(Reprinted with permission from Finance of America, one of our trusted lending partners)

Many seniors and their financial advisors know that they can use a reverse mortgage to take cash from their home’s equity while still living there. But most don’t realize they can also use a reverse mortgage to buy a house.

There are many advantages to this approach, including no monthly mortgage payment. You would, of course, still need to pay property taxes and hazard insurance and meet all loan requirements.
Here’s what else you need to know. 

What Is a Home Equity Conversion Mortgage (HECM) for Purchase? 

The Federal Housing Administration (FHA) announced the home equity conversion mortgage (HECM) for purchase program in 2008 to allow qualifying seniors 62 or older to use FHA-insured reverse mortgage loan proceeds to purchase a new primary residence.
A HECM for purchase offers all the benefits and borrower protections of a reverse mortgage. Instead of paying all cash or taking out a traditional mortgage, you finance part of the purchase price using a reverse mortgage. With this approach, you have no monthly mortgage principal and interest payments, and you don’t have to repay the loan proceeds and accrued interest until you move out, sell the home, pass away, or fail to uphold the terms of the loan.
How to Buy a New Home with a Reverse Mortgage
The reverse for purchase requires a down payment calculated according to the purchase price and the borrower’s age. It’s typically between 45% and 62% of the purchase price.  

“I helped a woman purchase a great home within walking distance of stores and restaurants that she wouldn’t have been able to purchase otherwise,” says Joshua Ezell, designated broker and owner of Breakthrough Real Estate & Property Management, LLC. 

Cons of a HECM for Purchase

While FHA guidelines make this a lower-risk option for qualifying seniors, it’s not a good fit for everyone. The most notable downside is that you could be diminishing your heirs’ inheritance. After the loan is paid back when you leave the home, there will be less money in your estate than if you owned the home outright.

In general, reverse mortgages have higher interest rates and closing costs than traditional mortgages. However, when weighing the two options, many people find the benefit of no monthly mortgage payments outweighs the difference in interest rates.
In addition, not all homes qualify for this type of financing. “For example, some manufactured homes and cooperative units don’t meet the minimum requirements of the program,” says Andrew Latham, a certified personal finance counselor and managing editor of SuperMoney.com. 
It’s worth enlisting the help of a financial professional to help you weigh the pros and cons of any loan before making a decision. 

How to Apply for a HECM for Purchase

The reverse for purchase application process is similar to most mortgage applications, except you’ll work with an FHA-approved HECM lender. Because of that, your current financial institution might not be your reverse-for-purchase lender.  
In addition, you will meet with a counselor from an independent, HUD-approved housing counseling agency to ensure you understand what makes a reverse mortgage different. (Some proprietary lenders require this counseling as well.) 
“Because they don’t require monthly mortgage payments and don’t have to be repaid until the mortgagee leaves the home or the borrower defaults, they require the homeowner to have a lot more equity in the property to protect the lender as the principal increases,” says Khari Washington, a real estate broker and owner of 1st United Realty & Mortgage.
Most seniors who are selling one home and buying another with a reverse mortgage, fund the down payment with home sale proceeds. You can also use savings. 

Qualifications for a HECM for Purchase

HECM for purchase qualifications are the same as those for reverse mortgages. You must:  

  1. Be at least 62 years old.
  2. Be current on any debts owed to the federal government 
  3. Live in the home as your principal residence
  4. Be financially able to pay property taxes, homeowners’ insurance, HOA fees if applicable, and other associated homeownership costs
  5. Participate in a consumer information session with an approved HECM counselor

Pros of a HECM for Purchase 

There are several advantages of a reverse mortgage for purchase, including:
  1. If you’re selling one home to buy another with a reverse for purchase, you pay one set of closing costs rather than two.
  2. There’s no monthly mortgage principal and interest payment, which allows you to preserve more of your savings.
  3. You can get more home for your money, possibly allowing you to afford upgrades or purchase a more expensive home.
  4. It can help improve your quality of life by moving to a smaller home, closer to family, or relocating to a preferred neighborhood.

In addition to doing a credit check and establishing that you can continue to afford your home’s insurance and upkeep, the lender will conduct a financial assessment to make sure you don’t have delinquent federal debt. It will also appraise your home and do a title search before approving your application. And you will have to provide income verification, including Social Security, pension income, investments, 401Ks, IRA, etc.

Become Educated about HECM for Purchase Loans  You can learn more about FHA HECM loans for seniors through the Consumer Financial Protection Bureau, and the U.S. Department of Housing and Urban Development. 

This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.

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Refi vs Reverse

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What Are the Differences Between a Cash-Out Refi and a Reverse Mortgage? 

(Reprinted with permission from Finance of America, one of our trusted lending partners)

Both a cash-out refi and a reverse mortgage allow the borrower to take advantage of accumulated equity, but there are key differences between the two loans

Loan Approval 

With a reverse mortgage, the borrower and property must meet all eligibility conditions, and the borrower must generally be 62 years or older. To qualify for a reverse mortgage, borrowers must also attend a counseling session before closing to ensure they fully understand the rights and responsibilities of the loan.

To be approved for a cash-out refi, the borrower must have an appropriate debt-to-income ratio and meet income and credit score requirements. The loan officer may require proof of two years of income, and a credit check will likely be part of the process. There is no age restriction on a cash-out refi.

Loan Payout and Payments 

The cash-out refi allows the borrower to receive a cash payment wrapped into the total amount of their new mortgage. The borrower gets the cash-out funds to use at their discretion then makes monthly mortgage payments under the terms of their new mortgage. These monthly payments cover both principal and interest, and the borrower’s equity in the home typically increases as monthly payments are made. 

For a reverse mortgage, the borrower may receive loan proceeds as monthly payments, as a lump sum, as a line of credit, or a combination of the three. A critical difference between a cash-out refi and a reverse mortgage is that a reverse mortgage does not require a

monthly mortgage payment. The loan balance grows over time as accrued interest is added to the loan, which may decrease the borrower’s equity in the home. As long as the borrower meets the terms of the loan, it does not need to be paid back until the borrower sells the house, passes away, or no longer occupies the home as their primary residence. Reverse mortgage borrowers are still responsible for homeowners’ insurance, property taxes, maintenance, and other fees associated with the home (e.g., HOA fees).

When Does a Cash-Out Refinance Make Sense?  

If a lower interest rate is available and the borrower has substantial equity in the home, a cash out-refi is a favorable option. Like any loan, homeowners must meet qualifications to secure a cash-out refi.   

Here are several additional factors that might make a cash-out refi a good option:  

The borrower is employed and receives steady income or substantial cash flow from retirement accounts

The borrower wants to secure a lower interest rate and, in exchange, is able to take on higher monthly mortgage payments

  • The borrower needs funds for ahome improvement project, debt consolidation, or college education.   

A cash-out refi is often a great option for the homeowner who can afford monthly mortgage payments and wants to use the cash out to increase the property’s value, for example, building a swimming pool. It also could make sense to use it for investments like funding a child’s college tuition (especially if the interest rate is lower than a student loan).

When Does a Reverse Mortgage Make Sense?  

Older homeowners who want to stay in their homes and take advantage of their accumulated equity may find a reverse mortgage a viable option. A reverse mortgage can help older borrowers pay off healthcare expenses, supplement income, or fund home improvements without putting additional stress on their monthly cash flow.  

A reverse mortgage may be preferable to a cash-out refi under these circumstances:   

  1. The borrower needs to supplement income in retirement or struggles to qualify for other loans.  
  2. The borrower is on a limited budget and wants to forego making monthly mortgage payments.   
  3. The borrower wants to make lifestyle changes like traveling but has the necessary funds wrapped up in their home equity.  

Be aware that if you don’t pay your property taxes or homeowner’s insurance, the property deteriorates and necessary repairs are not made, or if you no longer occupy the home as your principal residence, you will default on the loan, and the balance you owe will be due immediately.

A reverse mortgage caters to older borrowers who want to tap their home equity to improve their cash flow or pay for a significant expense their current budget doesn’t allow for.   

What Is the Bottom Line?  

Both types of loans have pros and cons, and everyone’s situation is different. The best option for you will depend on your financial situation and goals, so talk to a trusted financial advisor or lender before committing to a decision. 

This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.

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What Is a Reverse Mortgage?

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What Is a Reverse Mortgage?

(Reprinted with permission from Finance of America, one of our trusted lending partners)

A reverse mortgage is powerful financial tool that can help seniors unlock home equity and supplement their retirement income. These loans let qualified homeowners ages 62 and older take cash from their home’s equity while still living in the house. The lender pays the homeowner in a monthly payment, in a lump sum, as a line of credit, or a combination of the three.

Borrowers are required to meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. And the borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.

Many people continue to have misconceptions about these loans. Reverse mortgages have evolved over the past decade. Now, certain safeguards are in place to protect consumers. Members of the National Reverse Mortgage Lenders Association (NRMLA) are required to adhere to a strict code of ethics and pledge to serve borrowers with integrity.

Also, the U.S. Department of Housing and Urban Development (HUD) requires borrowers who are interested in a home equity conversion mortgage, or HECM (pronounced “heckum”), to go through an approved counseling agency to ensure they fully understand the process, the loan terms, and what all their options are before they apply.

How Do Reverse Mortgages Work?

A reverse mortgage is a tool that lets the borrower convert part of their home’s equity into cash without selling the house or making monthly mortgage payments. Typically, when you’re older, you may not owe that much on your home, and you may have built up a lot of equity, in which case you may be able to pull more money out of it.

Unlike a conventional mortgage, where you make monthly payments to the lender, in this case, the reverse mortgage lender pays loan proceeds to you. You will be required to pay for things like property taxes, homeowner’s insurance, the upkeep of the property, and other obligations outlined in the terms of your loan agreement.

Types of Reverse Mortgages

According to the Federal Trade Commission’s Consumer Information website, there are three types of reverse mortgages. Each type of reverse mortgage is unique and has it’s own advantages. Here are the main types:

Home Equity Conversion Mortgages

HECMs are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).

Single-purpose reverse mortgages

  • These are the least expensive option and great for homeowners with low to moderate income. They’re offered by some state and local government agencies, as well as nonprofit organizations. But there are some limitations. They’re not available everywhere and can only be used for a single purpose designated by the lender, such as paying for home repairs, making improvements, or paying property taxes.

Proprietary reverse mortgages

These are private loans that are only backed by the companies that develop them. The advantage here is for owners of higher-valued homes. They can possibly get a bigger loan advance from a proprietary reverse mortgage. If your home has a small mortgage but appraises at a high value, you may qualify for more funding.

Who Qualifies for a Reverse Mortgage?

Reverse mortgages are specifically designed for older borrowers. This option is generally only available to people 62 and older who meet the following basic criteria:

  1. You must be listed on your home’s title as the owner.
  2. Your income and credit clear a financial evaluation.
  3. Your home is your primary residence for the life of the reverse mortgage.
  4. You cannot be delinquent on any federal debt.

Eligibility Requirements

Reverse mortgages require borrowers to meet a specific set of requirements. To be eligible, you must:

  1. Meet with a reverse mortgage counselorwho’s approved through HUD before you apply to discuss what a reverse mortgage is, how it works and the fees associated with it.
  2. Be able to show you can pay your property taxes, condo association fees, and home insurance, as well as keep up with maintenance and repairs.
  3. Make timely payments on property taxes and flood and hazard insurance.

Be aware that if you don’t pay your property taxes or homeowner’s insurance, the property deteriorates and necessary repairs are not made, or if you no longer occupy the home as your principal residence, you will default on the loan, and the balance you owe will be due immediately.

Reverse Mortgage Misconceptions Debunked

There’s a lot of bad information out there about reverse mortgages. Here are the most common myths:

  • You won’t own your home anymore. False.You are still the owner, and the title stays in your name.  A reverse mortgage is simply a loan that gives you access to your home’s unused equity.
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  • The lender will get your home instead of your heirs. False.A reverse mortgage is like a traditional mortgage, in that the title of the home stays in your name. As the owner, you can leave your home to whomever you want. If your heirs want to keep the home, they’ll need to pay off the loan balance or refinance it. If they don’t want to take possession of your home, either your heirs or the lender can sell it to pay back the loan. If there is any remaining balance over and above what is owed, it goes to your heirs.
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  • HECMs have prepayment penalties. False.There is no prepayment penalty on a HECM. A reverse mortgage is a way to tap home equity and you can choose to pay down or off the loan ahead of schedule without any penalties. 
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  • A reverse mortgage prevents you from selling your home. False.If at any time you need to sell your house, you can. The proceeds from the sale would go to pay off the remaining balance of your loan. Whatever’s left over is yours to keep.

Cost of a Reverse Mortgage

The cost of your reverse mortgage will depend on the type of loan you choose and the lender. There are, of course, some upfront costs

Here are some of the costs you can expect with a HECM:

Reverse mortgage counseling

The average cost for HUD-approved counseling is around $125, which can usually be rolled into your loan costs.

Origination fees

This fee is paid to the lender and can’t exceed $6,000.

Real estate closing costs

These costs often include an appraisal, a title search, surveys, inspections, recording fees, mortgage taxes, credit checks, and other fees paid to third parties.

An initial mortgage insurance premium

For HECMs, an initial two percent mortgage insurance premium (MIP) is charged by your lender and paid to FHA.

Once the HECM is established, there are ongoing fees you should plan for, including:

  1. Interest
  2. Servicing fees paid to your lender that covers such things as sending out your account statements, loan proceeds distribution, and ensuring that you’re maintaining your loan requirements
  3. An annual MIP that equals 0.5% of the outstanding mortgage balance
  4. Association dues if you own a condo, home owner’s insurance, and property taxes

To really get an idea of your potential expenses, ask your counselor or lender to explain the Total Annual Loan Cost (TALC) rates which project the annual average cost of a reverse mortgage, including all the itemized costs.

How to Apply for a Reverse Mortgage

Applying for a reverse mortgage is a straightforward process. The steps are similar to applying for a regular mortgage.

  1. Choose a lender. The National Reverse Mortgage Lenders Association is a good resource to find a reputable lender. Be sure to compare the rates that are being offered.
  2. Ask questions. Once you find a lender, ask as many questions as you can. You want to know your options, how long the loan will take to close, whether a fixed rate or variable rate is better for you, etc.
  3. Choose your disbursement type. If you choose a fixed-rate mortgage, you’ll receive your money in a single lump-sum payment. If you go with a variable-rate mortgage, you can get the money you’re borrowing as a lump sum, line of credit, in monthly payments, or a combination.
  4. Get counseling. Before you can apply, you’ll need to attend a counseling session from a HUD-approved counseling agency. HUD has a list of approved counselors available in your state.
  5. Fill out the application. Once you’ve gone through your consultation, you can apply with your chosen lender. As with any traditional mortgage,you fill out an application and provide various documentation requested by your lender.
  6. Wait for appraisal.Once you apply, your application will be evaluated and your home appraised.
  7. Receive funds. If all goes well,you’ll close on your loan and receive your funds.

Pros and Cons of Reverse Mortgages

Reverse mortgages are powerful financial planning and retirement funding tools. However, they aren’t for everyone, so you should understand the benefits and drawbacks of these loans.

Pros of a reverse mortgage:

  1. You are still the owner of the house and retain the title. You can continue to live in your home as long as you meet all of the loan obligations, including living in the property as the principal residence, maintaining the home, and paying property charges, including property taxes, fees, and hazard insurance. Theloan will need to be repaid if you do not meet these loan obligations.
  2. A fixed-rate reverse mortgage keeps the same rate for the entire loan term, so you are protected if market rates rise.
  3. With a HECM, with very few exceptions, you can use the money as you see fit.
  4. You do not make any monthly mortgage. The only mortgage payment you make is due in full when you sell your home, pass away or otherwise fail to meet all loan obligations. However, you must continue to pay taxes and insurance on the property and maintain the property.
  5. A reverse mortgage is what’s known as a non-recourse loan. Upon sale of the property,neither your nor your heirs are personally liable for any amount of the mortgage above the value of your home. If you sell your home at the appraised fair market value, and that amount is less than what you owe, your mortgage insurance will pay the remaining balance of your loan.

Cons of a reverse mortgage:

  1. While the interest rates are similar to other types of mortgage loans, the fees tend to be higher, though the majority of these can be rolled into the loan.
  2. Interest and fees are added to the loan balance, which increases over time.
  3. A variable-rate reverse mortgage means your rate could go up if the market fluctuates.
  4. Vacation homes and rental properties aren’t eligible.

Reverse Mortgage Calculator

A reverse mortgage calculator can help you get a rough idea about how large of a loan you may qualify for. Many lenders offer free loan calculators. Typically, these tools factor in the day’s current interest rate and can let you know if a reverse mortgage even makes sense for you.

Usually, all you have to do is supply your age, home value, current mortgage balance, if you’re still carrying one, and the state where you live. Instantly, the reverse mortgage calculator displays an estimate of how much money is available to borrow and your remaining equity.

The decision to take out—or not take out—a reverse mortgage is a big one. Before you apply, it’s always a good idea to speak with a financial advisor to discuss your goals and options.

This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.

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