FREE NEWSLETTER
A REVERSE MORTGAGE lets you borrow against the value of your home without paying back any of the loan during your lifetime. Instead, the loan is repaid when you move permanently or, more likely, after your death. At that juncture, the total amount owed, including all accrued interest, can’t exceed your home’s value. You can typically borrow more if you’re older, interest rates are low or your house is appraised at a high value. The money received is tax-free.
The big downside is cost. To get a handle on the expenses involved, try playing with the calculator offered at ReverseMortgage.org, which is the website of the National Reverse Mortgage Lenders Association. At the bottom of the initial calculation, click on “Details.” As you’ll see, there’s a host of fees charged, plus the initial loan interest rate will likely be higher than on a conventional mortgage.
In addition, keep in mind that you still have to handle the home’s maintenance, property taxes and insurance. If those expenses prove too burdensome, you may be compelled to move, at which point the reverse mortgage has to be repaid.
One option for well-heeled families: Arrange a private reverse mortgage. To help their parents pay for retirement, adult children or other family members might provide a credit line that is secured by the parents’ home. That gives the parents access to extra cash, while the adult children can be fairly confident they’ll eventually get their money back, plus interest. The costs involved are far lower than with a conventional reverse mortgage, and it ensures the house stays in the family. For more information, head to NationalFamilyMortgage.com.
Our Humble Opinion: Despite all the drawbacks, you shouldn’t rule out a reverse mortgage. Let’s face it: You get only one shot at retirement and you should make the most of it, even if it means spending assets you had hoped to bequeath to your children. That said, you should consider a reverse mortgage a last resort, not your first choice.
Next: Jonathan’s Retirement
Previous: Spending Home Equity
Articles: Reverse Engineering, Home Rich Cash Poor and You May Be Surprised
Perhaps an actual example will help demonstrate the true value of a Reverse Mortgage.
My wife and I used a HECM for Purchase Reverse Mortgage to build a new home, for retirement, in 2018, right after the laws for Reverse Mortgages were cleaned up, tightened up, and basically became more borrower friendly.
We wrote a check for $184,000 and purchased a $325,000 home on 6 acres in NC, 14 miles from town…town being Fayetteville, NC.
The fees to purchase the home were @$13,000, all in. Our initial interest rate was 3.25%, fixed.
In 2020, we refinanced the home, in order to gain access to a Reverse Mortgage, with a Line of Credit. Since 2018, our home has increased in value, partially due to property improvement but primarily to increase in the value of the hime. In March of 2024, it is valued at $425,000.
In 2023, in anticipation of retirement in January 2024, we paid the mortgage on the home down to $100.00, establishing a Line of Credit of @$234,000. This accomplished a number of tax favorable things, the primary benefit of which is that any money we take from the line of credit is tax free, as it is debt, and even more important, the line of credit is guaranteed to grow over time, by contractual requirements. One additional benefit that makes the line of credit a wonderful option to have is the legal requirement that the mortgage company credit the line of credit the same rate of interest that it charges on the outstanding mortgage. The rate is a variable rate, but since my mortgage balance is de minimis, at $100.00, I have been earning 6.25% – 7.75% (since July 2023) or $1,500 to $1,250 monthly, while paying a few dollars and pennies to the mortgage. (In actuality, I am not actually paying anything to the mortgage…rather the mortgage balance increases by the few dollars and pennies.)
In January, when I retired, I took $53,000 and bought a new SUV for cash. My outstanding Mortgage Balance is not@$53,350 but in February, when I was charged the $350 interest, I was credited @$1,249 in Line of Credit Growth.
Bottomline, for us the Reverse Mortgage is a great tool in our retirement income tool kit, along with our Social Security benefits (claimed at age 70,) equities invested with Vanguard, in Roth IRAs, Traditional IRAs, a brokerage account, and 4 annuities with income riders, that we can “turn on,” as we want to increase our income over the years.
Is a reverse mortgage the right solution for you? I have not idea and neither will you, until you investigate it.
BTW, I could not agree more with Mr. Thompson about Dr. Wade Pfau’s Reverse Mortgage book. I had the pleasure of being a fellow faculty member with him for many years. There is a new, updated edition published in 2024. I highly recommend it.
The rules have changed.
I highly encourage folks to read Dr. Wade Pfau’s book “Reverse Mortgages” (2nd Edition).