Gabe Bodner, Gabe Bodner of The Bodner Team

Gabe Bodner

When you retire, would you rather have $500K of home equity and no cash in the bank? Or would you rather have $500K of cash in the bank and no home equity?  Let’s face it, cash is usable, and equity is not. You simply cannot take your front door to the store and buy groceries or gas with equity, but you certainly can with cash.

Here is a retirement statistic for you to ponder…over 10 million homeowners in the U.S. age 65 and older are still making mortgage payments. Now consider this, more than half of all seniors in the U.S. are in jeopardy of running out of money before they die. (Source: Center Of Retirement Research At Boston College).

However, many of them can avoid this risk by utilizing one of their most secure and dependable assets, their home equity.

Let me ask you another question…are you prepared financially for an unplanned event?  Nobody wants to think about the possibilities…like losing a spouse or getting a terminal illness. However, losing a spouse means you can lose around 40 percent of your household income.  What about getting a divorce and losing half of everything you own (divorce rates of couples age 55 and over has doubled in recent years). Do you wait for a rainy day to go out and buy an umbrella or do you buy an umbrella today in case it rains someday in the future? It seems silly to wait for the rain to come then come up with a plan right?

This is where a reverse mortgage can be utilized as an umbrella…to protect yourself, to plan and to be prepared in case life happens. A reverse mortgage is a loan that is available for homeowners age 55 and older. This is an option for seniors to access a portion of their home’s equity that is sitting static and unusable. The proceeds received from a reverse mortgage can be used for anything, whether it be to pay off a regular mortgage that requires monthly payments, cover living expenses, consolidate debt, medical expenses, making home improvements, vacations, gifting or even legacy planning. Additionally, because the proceeds from the reverse mortgage are considered borrowed funds, there are no income taxes charged on the proceeds. You can even use a reverse mortgage to purchase a new primary residence.

Unlike a traditional mortgage or home equity line of credit, a reverse mortgage does not require any monthly payments (the homeowner must still pay for homeowner’s insurance, property taxes, home maintenance and HOA dues). The interest charged on the loan is simply added to the loan balance and gets paid back when the loan is paid off. The loan does not need to be paid off until the last borrower permanently leaves the home (either passes away or no longer lives in the home as their primary residence) or decides to sell the home. So, in many cases if the homeowner lives in the home for the rest of their life, it does not require repayment until the last living borrower permanently leaves the home or loan terms are not met.

There are quite a few misconceptions with reverse mortgages and there have been many horror stories in the past unfortunately. Many people think that you must own your home “free and clear” meaning that you don’t have a mortgage on your home.  However, that is also not true. A reverse mortgage can be utilized to pay off a traditional mortgage ultimately eliminating monthly mortgage payments (except for taxes, insurance, and maintenance).  As a matter of fact, most reverse mortgages that are done today are done to pay off a traditional mortgage.

Traditional financial planning tells you that you should not have a mortgage payment when you enter retirement. However, due to inflation, rising health care costs, fewer pension plans, lower savings rates and higher housing costs, many Americans are retiring today with a mortgage payment.  herefore, a reverse mortgage is a great option for folks looking to retire but “cannot afford to retire”. In my opinion, one of the most dangerous and costly things that someone in retirement can do is to use taxable funds (like from an IRA, 401K or managed account) and make a mortgage payment. This is simply using liquid funds, paying taxes (and penalties in certain cases) to pay down a mortgage which ultimately creates more equity…which is once again illiquid. So why not save your liquid funds, pay less in taxes and penalties so those assets could last you longer and improve your overall financial longevity?

In conclusion, a reverse mortgage may be considered by any homeowner age 55 and older who has a significant amount of equity in their home.  The reverse mortgage has several different ways to access the equity, therefore you should contact a reverse mortgage planner to review the options that are best for you.

By Gabe Bodner. Gabe is a retirement mortgage planner and licensed mortgage originator in Colorado. Gabe utilizes the latest research from the top researchers to assist his clients to live for today and
plan for tomorrow. To reach Gabe, call 720.600.4870, e-mail [email protected] or visit reversemortgagesco.com.