Most people live for the moment and don’t really “live life” for the long term. That being said, mindful planning for retirement should consider the utilization of one’s home equity, which can be quite essential in balancing short-term concerns with long-term goals. A reverse mortgage just may be one of the best financing tools around for maximizing cash flow and maintaining the longevity of one’s liquid portfolio.
A reverse mortgage is a loan for borrowers 62 years of age and older, and a financial tool that can help access and convert the equity into a tax-free loan with no monthly mortgage payment (interest accrues and is added to the principal outstanding).
The reverse mortgage loans are not just for people who are down and out but can be a great tool for financially comfortable retirees looking to firm up their retirement security and help them make the right decision so that they don’t sell portfolio assets at the wrong time or under pressure.
Two new, important, improved guidelines and protections were put in place by the FHA such as:
- Financial assessment: borrowers actually have to qualify now using income and assets to make sure they can pay for real estate taxes and insurance (maintenance if a condo).
- Non-borrower spouses under the age of 62 are now allowed on the loan. Years past, before the changes, many mortgage companies would suggest taking spouses off the deed, under the age of 62, in order to qualify exposing those spouses to mortgage default if the borrower spouse died. No more. Now that risk is removed.
A reverse mortgage can potentially:
Replace liquidity, allow one to postpone taking their Social Security or pension payouts, be used as a cushion to support a borrower’s strategy on spending (proceeds can be tax-free supplemental income), can provide access to cash when investments decline in a down market, can cover gaps on medical coverage such as health insurance or long-term-care policies when procedures aren’t covered, increase cash flow by consolidating and eliminating credit card and mortgage debt, provide an opportunity of wealth diversification, allow for the purchase of the new home without utilizing total cash funds (so if a person doesn’t want to use all cash to buy a home because they don’t want to mortgage payment, this allows them to use a partial amount of savings and still not have a mortgage payment, and they may find that the real estate taxes and insurance are equal to if not less than if they were to rent), and improve financial situations without affecting Social Security or Medicare (one should check with their advisers). If structured correctly, it may also give you an opportunity for a Roth conversion and a better tax-opportunity situation.
So how does one qualify? At least one of the borrowers must be 62 years or older, use the home as a primary resident and generally have at least 50 to 60 percent equity in the property.
There are two types of reverse mortgage products: 1. a fixed-rate reverse mortgage, and 2. an equity line. The home-equity conversion line of credit is not like a regular equity line. Why? Because the unused portion of that line grows, and in a down market cannot be reduced or eliminated by the lender, so this becomes a fantastic way to create a cash reserve by eliminating mortgage payments, minimizing risk and diversifying assets. There are also many ways of accessing the money such as a lump sum or a partial draw, monthly payments or a combination of all those.
For sure, reverse mortgage is not for everyone; the key is to analyze the situation and make sure, but there is a tremendous benefit by utilizing one of the greatest financial tools this government has to offer in this country and in today’s real estate marketplace.
By Carl Guzman
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp., a Zillow five-star lender. http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y. He is a residential and reverse mortgage financing expert and a deal-maker with over 26 years industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]