The Retirement Paradox – Retiring for an unpredictable number of years with unpredictable expenses and somewhat-predictable income.
The New Reverse Mortgage Refinance Strategy
Do you currently make a monthly mortgage payment to the bank and would prefer that they send you a check every month, instead?
If this sounds like magic or the late-night rantings of Fred Thompson, it isn’t. The difference is that a conventional “forward” mortgage is building the equity in your home while the reverse mortgage is essentially spending it.
For some retirees the plan is to leave the family home to their heirs “mortgage free”. However for many seniors that’s wishful thinking because the ever increasing costs of goods and services during retirement has put a crimp in their lifestyle.
Here are four strategies you can use to help guarantee a safe and secure retirement.
The New Reverse Mortgage Credit Line Growth Strategy
A unique feature of The New Reverse Mortgage is the line of credit automatically grows over time by roughly the loan’s interest rate and it increases with the age of the younger borrower.
The longer you wait to spend the proceeds after taking out the mortgage, the larger your line of credit will be when you do spend it. This feature can be used to increase borrowing by taking out the loan early in retirement and spending the money years later.
As retirement researcher, Wade Pfau points out in Incorporating Home Equity into a Retirement Income Strategy, “. . . opening the line of credit at the start of retirement and then delaying its use until the portfolio is depleted creates the most downside protection for the retirement income plan.
Income Strategy of Last Resort
The most common use of home equity by retirees today is probably to support spending when resources run low at the end of retirement. This was the common wisdom prior to recent research.
The new research, however, suggests that spending from the HECM early in retirement rather than as a last resort tends to lead to better outcomes. When the spending will occur later in retirement, the research suggests it’s better to lock in the HECM early and let the line of credit grow. This is especially true in today’s low-interest rate environment that will contribute to growth of the line of credit as rates rise. According to Pfau, “the strategy for using home equity as a last resort supports the smallest increase in success.”
The New Reverse Mortgage Term and Tenure Strategy
Tenure payments are one of the options for HECMs. These are monthly payments issued to the borrower for as long as he or she lives in the home. They are similar to an annuity, except that annuities pay as long as the annuitants are still living.
Another major difference between tenure payments and an annuity is that the retiree may “leave money on the table” if she dies soon after purchasing an annuity. If that happens with The New Reverse Mortgage, there will be no such loss because the borrower will simply have borrowed less of her home equity. With tenure payments, the borrowed amount may eventually exceed the value of the home, but the borrower will never need to repay more than the home’s then-current value.
The RELOC as an Emergency Backup Strategy
The Retiree’s Equity Line of Credit (RELOC) can be established to act as an emergency fund. As described above in the Credit Line Growth Strategy, it might be wise to secure the mortgage early in retirement to allow the credit limit to grow over time.
The New Reverse Mortgage isn’t for everyone…but it could be!
Is The New Reverse Mortgage right for me?
If you’re still wondering if a Reverse Mortgage is the right solution for you but you’re not ready to sit down with one of our Reverse Mortgage Experts, then we’ll be happy to mail (or email) you Use Your Home to Stay at Home which is the official federally approved consumer booklet for those considering a reverse mortgage.
Some of this information first appeared on retirementcafe.com