I’m often asked why more boomers don’t consider taking out reverse mortgages to liberate the equity in their homes.
From the beginning, Home Equity Conversion Mortgages (a.k.a., reverse mortgages) were based on the premise that most seniors have a majority of their net worth tied up in the equity in their homes. What they needed was a way to liquefy their equity, while remaining in their homes. The reverse mortgage was created to solve that need.
From 1989 to 2009, HECMs were considered a needs-based product. They were the answer for people older than 62 who were considered “house rich but cash poor.”
Until 2009, if liberating some of the equity in your home would enable you to improve your living standards, this product was tailor-made for you.
Unfortunately, during the crash of 2008 when house prices were low, the liabilities of the insurance on FHA homes became greater than the total market value of the homes. On paper it appeared the program was underwater.
As a result, in 2010 the rules changed and it became harder to qualify for these types of loans.
Harder, but not impossible. For people who qualify, a reverse mortgage can still be a viable option to consider.
Below are 4 situations where a reverse mortgage might be the best solution for baby boomers:
- When you need a line of credit to pay housing expenses
Let me tell you about my personal situation: Like many seniors, I’ve paid off my home and set up investments to generate a comfortable income in retirement.
Still, even with no mortgage my home expenses, which include taxes, insurance, HOA, maintenance, and utilities, still cost about $2,000 per month.
I have no intention of taking that $2,000 from my monthly retirement income to support my home. Instead I intend to let the home pay for itself by taking a HECM line of credit and using it to pay the expenses. That frees up an extra $24,000 per year that I can spend enjoying my retirement. I can’t think of a better use of my home’s equity.
- When you want to give your home’s equity to your grandkids before you die.
I have a friend who planned to leave her grandkids the equity in her home as an inheritance to pay for part of their college expenses.
But, there was one problem: They were ready to go to college long before she was ready to die. The solution was to take out a reverse mortgage and grant gifts while she was still alive. The reverse mortgage enabled her to see how her financial gifts enhanced her grandkids’ lives.
- When you want to avoid drawing down your principal at the wrong time.
The fastest way to deplete a nest egg is to draw out principal when the market is not performing well. Market downturns usually lead to lower dividends or interest paid, which can lead to a withdrawal of principal to make up for the shortfall.
One solution is to use a reverse mortgage line of credit to make up the short fall during the downturns, and paying it off during the corrections. A great advantage of the reverse mortgage is that if the correction takes longer than expected, you’re still covered with no monthly payment to further deplete your cash.
- When your monthly expenses are greater than your monthly income.
The most obvious use of a reverse mortgage for boomers is to make up the difference between expenses and income. In many cases the difference can be as simple as just eliminating a monthly mortgage payment.
Back when I originated reverse mortgages, I saw countless instances where eliminating a $500 monthly mortgage payment meant the difference between buying groceries for the month or skipping meals. The program was originally designed to deal with situations like this.
If you struggle every month because there’s more month left than money, I encourage you to consider how a reverse mortgage might help you.
**Contact me for a free, no-risk, no-strings-attached evaluation to determine if a reverse mortgage is the right solution for you. During our call, we will discuss your situation and I will put you in touch the right people to guide you on whether a HECM is the right solution for you.
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