Your Home as a Retirement Income Source

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By Peter Mastrantuono

Advertising for reverse mortgages is ubiquitous. In print and on radio and TV, celebrity endorsers have extolled the manifold benefits of converting home equity into an income stream that can help individuals realize their retirement dreams.  While reverse mortgages may be suitable and beneficial to some, the decision to tap home equity to supplement retirement income should be made with great care.

Conceptually, a reverse mortgage seems quite simple: It is a loan against a home’s unencumbered value, the proceeds of which may be used by the homeowner to meet a range of financial needs, from paying for house repairs to meeting retirement expenses.

In practice, however, a reverse mortgage is quite complex.  There are several types of reverse mortgages, including those designed for lower income homeowners, proprietary private loans through for-profit companies and a Home Equity Conversion Mortgage, which is an FHA-insured reverse mortgage.

In order to qualify for a Home Equity Conversion Mortgage (HEMC) loan, the homeowner must be at least 62 years old and the home against which the loan is being made must be the borrower’s primary residence.

The amount that may be borrowed is based on multiple factors, including the age of the homeowner and his or her spouse, the value of the property, the homeowner’s equity and the interest rate on the loan. The maximum amount that can be secured through a reverse mortgage in 2019 is $726,525.

Individuals have several options in how they may receive their loan: a lump sum (available only on fixed rate loans), monthly payments on either a lifetime basis or for a fixed period of months, a line of credit, or some combination thereof.

Loan repayment is not required until the homeowner (including the spouse) dies, the home is sold, the homeowner stops living in the home for 12 consecutive months, or breaks the conditions of the loan (e.g., paying property taxes, retaining homeowner’s insurance and maintaining the property).

Since HEMC loans require no monthly repayments and are tax-free “income,” they may represent an attractive source of retirement income. However, such loans can be exceptionally expensive. For instance, there is an origination fee of the greater of $2,500 or two percent of the first $200,000 in appraised value, plus one percent above $200,000 (capped at $6,000), mortgage insurance premiums that consist of a one-time fee of two percent of home value and an annual fee of 0.5 percent on the outstanding loan balance and a number of miscellaneous charges typically associated with a home closing, such as title insurance, recording fees, survey, etc.

A reverse mortgage may be appropriate for individuals who have insufficient retirement savings, expect their investment portfolio to outperform their home’s appreciation, or to mitigate the sequence of returns risk.

Individuals should consider engaging an experienced financial advisor not only to navigate the complexities attached to making the decision to secure a reverse mortgage, but also to understand the most effective strategy for integrating a reverse mortgage into an overall retirement plan. For example, a financial advisor can help with determining which loan option and the timing to begin payments that will best fit an individual’s particular needs and circumstances.

Peter Mastrantuono is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.

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