Is A Reverse Mortgage The Key To An Enjoyable Retirement?

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Hunter discussing reverse mortgages.
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Reverse mortgages have undergone significant transformations, emerging as a viable tool in retirement planning for an emergency lump sum of money. Hi, I’m Hunter Brockway, founder of Volcker Retirement Strategies, here to guide you to a successful, stress-free retirement while spending more and avoiding being heavily taxed.

It’s not uncommon to need a lump sum of money in retirement for medical expenses or long-term care. If you don’t have a long-term care policy, you may be scrambling for additional funding. Some people either wait too long to apply for a long-term care policy or are in poor health. One of the planning strategies we look at is the use of reverse mortgages as a quasi-long-term care plan.

A reverse mortgage is money lent to a homeowner who usually has at least 50% equity in their home, with the home as collateral. Some require you to be at least age 62. Reverse mortgages have had a bad rap due to irresponsible uses. In the last few years, government regulations have tightened around reverse mortgages. That, coupled with responsible use, is proving to show them in a better light.

There are two general types of reverse mortgages: the HECM and the HELOC. The HECM is a home equity conversion mortgage. You apply and get a lump sum of money for the equity in your house, with interest factored into the lump sum. The HELOC is a home equity line of credit. You apply for this line of credit, but only pay for what you use.

The costs of reverse mortgages vary, but depending on the type, credit value, etc., to ballpark it, you may see something along the lines of 2% of the value of the loan, plus a couple to a few thousand dollars in origination fees, and a couple to a few thousand dollars in closing fees. So, for a $500,000 HECM, you may be looking at close to $18,000 to $20,000 in fees.

This is just a ballpark if you’ve never considered this strategy before. A planning note: money received from a reverse mortgage is tax-free and interest payments are tax-deductible. This obviously is not a reason to get a reverse mortgage, but when you calculate interest rates, tax brackets, etc., it’s worth incorporating into the plan.

The number one concern with a reverse mortgage is paying it back. Again, with a HELOC, it’s pretty simple. If you don’t need all or only need a small portion of the money, that amount can be paid back. But let’s say you use a HECM and have a large loan out against the equity in your home. In some cases, that balance may be deferred to the last borrower or surviving spouse, so long as they meet the terms of the loan and can pay it back outright or by selling the home. If beneficiaries wish to keep the home, they owe the lesser of the loan balance or 95% of the home value. They may also be able to refinance through a traditional mortgage.

If the balance of the loan exceeds the value of the home, they can forfeit the home in lieu of selling it and paying back the loan. The title of the home stays with the borrower in this case.

Some thoughts on deciding if a reverse mortgage is right for you:
– What are your needs? Can you source this money from elsewhere via an insurance policy?
– If you implement the guardrails approach to retirement income, as we do, someone withdrawing money from their retirement portfolio has a buffer between their current spending and their lower guardrail or a rule that tells us we need to adjust our income.

As an example, if someone has a $1 million portfolio and is willing to invest in quality companies and maintain a proper war chest, they could withdraw about $4,500 monthly from their portfolio. Our lower guardrail establishes if a portfolio drops below $840,000, we will reduce our spending to $4,125. In other words, we have a $160,000 buffer.

However, before we consider making an adjustment, perhaps your lump sum needs total $100,000, and we are willing to take that from the portfolio, understanding we may have to make an adjustment sooner in the future. Of course, hopefully, you’ve been working with a professional and have a pot of tax-free money to pull from.

Another thought to consider: what are your legacy goals with the house? Do you plan to downsize your home and free up equity that way? Or might you plan to age in place, which could require added costs to outfit the home for safe living? Can you afford assisted living outright? Might you apply for Medicaid and instead benefit from Medicaid planning? Do you qualify for long-term care now and would rather pay for an insurance policy?

Take action. Think about all of this as you create your long-term care strategy. A large percentage of Americans will require care, and a decent percentage of that care will be required for over three years.

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