To include home equity into retirement planning, a reverse mortgage loan SantaClara is a potent financial tool. The purpose of this piece is to detail my own retirement strategy, which includes a reverse mortgage.
Many people would be shocked to learn that my retirement plan involves taking out a reverse mortgage. Finally, don't the poor and desperate always use reverse mortgages? Aren't they merely a “bailout” loan for people who have nowhere else to turn?
Thankfully, today's reverse mortgage is not like those of yesteryear. Even though it has improved greatly over the years, people still view it negatively.
Many people are pleasantly surprised to learn how the modern reverse mortgage operates. People are often surprised to learn that the claims made against something are exaggerated or false. When they learn how a reverse mortgage might improve their retirement quality of life and financial stability, they are likewise taken aback.
Equity problems with homes
The median net worth for a 65-year-old in 2019 was $268,700, according to the Census. A large portion of that sum ($182,000) was earned through equity in a house. In other words, the majority of a retiree's wealth is held in the form of home equity.
Now, it's time to consider the equity in your home. How does it influence your regular activities? I mean, it's probably not that much, right? Considering that, house equity isn't a readily available source of funds. You can't use it to pay for a trip, a new kitchen, or emergency medical care.
Your home equity is merely a figure, regardless of whether it is $5 or $500,000. In the San Francisco Bay Area, for example, there are retirees who are barely scraping by yet who own homes worth well over $1 million. Though they have the paper to prove it, they are millionaires, their paltry Social Security payments leave them in dire straits.
While it's great to build value in your house, it won't help your retirement finances unless you can turn that equity into cash.
Before the advent of “cash out” refinancing, homeowners had only two options for turning their home equity into liquid funds: selling the property or taking out a loan against the equity. If you wish to keep your current living situation, then picking option 1 is a no-brainer. The second choice has its advantages and can be the best choice in certain situations, but it also requires regular payments.
Fortunately, a third choice exists, and it's the best one: a reverse mortgage. By taking out a reverse mortgage, seniors can access their home's equity without having to sell or take on additional monthly mortgage payments. In the end, this will prove to be a potent tool for retirement preparation.
An Overview of Reverse Mortgages
Let me start with the fundamentals and clear up some misconceptions before I explain my approach. Reverse mortgages are not well understood by the general public.
The FHA-insured home equity conversion mortgage (HECM) is the most common type of reverse mortgage in the United States. For those over the age of 62, a HECM is a way to access a portion of their home's equity.
As long as you keep up with the property taxes and homeowners insurance, you won't have to worry about making mortgage payments.
Home ownership is inalienable, so you can leave it to whoever you like. Any leftover equity in the house will be passed on to your children.
Since the HECM is an insured loan, borrowers are protected from default. If you owe more on your mortgage than your home is worth when you go to repay it, FHA will make up the difference.
The money from a HECM doesn't affect your Social Security, Medicare, or income tax.
You can choose to receive the HECM's proceeds as a flat payment, as a line of credit, or as a monthly term/tenure income stream. Our next topic of discussion will be the credit line itself.
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