Seniors who are in a cash flow bind because of increasing expenses or a drop in their investment income may want to look into tapping one of their most valuable assets: their homestead.
There are several ways to do this. Homeowners could sell the home, but they would have to move. Or they could take out a loan against it, which would leave them with payments to make each month. The third choice is a reverse mortgage.
A reverse mortgage is a non-recourse loan that lets homeowners over 62 years old convert the equity in their house into cash. Yet it allows them to still live there, and retain title and ownership. The lender will give the payout all at once, as a fixed monthly income (up to lifetime), as a line of credit, or as a combination of these.
The money will have to be paid back with interest when your clients die, sell the home, or permanently move out. But they or their heirs have the option to pay off the reverse mortgage at anytime and keep the house. And the amount that must be repaid can never exceed the value of the home. Furthermore, if the sales price exceeds the amount owed, the excess will go to the homeowner or their estate.
There is no income or medical requirement to qualify for a reverse mortgage. And borrowers can use the money any way they wish, for example, to pay daily living costs, medical bills, or travel expenses.
The size of the reverse mortgage depends on several factors, including the youngest homeowner's age, the home's value, and current interest rates. The money they receive will be tax-free and will not affect Social Security or Medicare benefits. However, it could influence Medicaid qualification.
Take for example, Bill and Marge, ages 65 and 63 respectively. They own their home, which is valued at $250,000. Bill had to close his part-time consulting business because of health problems, and the loss of this income forced them to cancel a once-in-a-lifetime cruise that they had been planning for the past year. A reverse mortgage offered Bill and Marge the following options:¹
Single lump sum or line of credit - $140,285
Lifetime monthly income - $784
They chose the line of credit and took out enough to pay for their cruise and single-pay LTC insurance policies. They'll keep the balance of the available cash for another vacation, for an emergency, or to supplement their income in the future.
More information and a list of reverse mortgage lenders in your state are available from the National Reverse Mortgage Lenders Association. This source of retirement income promises to become more common as baby boomers with inadequate retirement savings tap whatever home equity they have.