Cut Costs in Retirement with a Reverse Mortgage

Retirement should be a period of celebration for all you’ve accomplished in your life —  not a time to stress about your financial situation.

Cutting costs in retirement will help you maximize your savings while helping you maintain the lifestyle you want.

One strategy to help seniors cut costs is a reverse mortgage, which eliminates monthly mortgage payments.

Here are all the ways a reverse mortgage can help you reduce costs in retirement.

A reverse mortgage can help you eliminate your mortgage payment

Housing is likely the biggest expense in retirement, especially if you have a mortgage. 46% of those ages 65-79 have a mortgage.

However, if you’re 62 or older, a mortgage payment is no longer necessary. This age group has access to a reverse mortgage, which pulls from the equity that’s been built up in your home from years of mortgage payments.

Traditional forward mortgages put equity into your home, while reverse mortgages take it out.

Of course, to put equity in your home, you continue to make monthly mortgage payments. A reverse mortgage eliminates the need to make these payments.

Example: Keeping your mortgage vs getting a reverse mortgage

Assumes buyer age of 67, 1% annual taxes, $70/mo insurance, no HOA. Forward mortgage at 3.5%.

With a reverse mortgage, you’re only responsible for paying property taxes, homeowners insurance, and general maintenance costs.

Over 15 years, this adds up to $90,000, while a 15-year forward mortgage has you paying a total of $291,600.

The $201,600 you save with a reverse mortgage can be used to bulk up your retirement income.

A reverse mortgage can eliminate other debt

Much like a home equity loan or line of credit, one way to use the cash from your reverse mortgage is to pay down your outstanding debts.

This might include auto loans, credit cards, personal loans, student loans for your children, or any other debts.

Why pay 20% interest on a credit card when you could pay much less for a reverse mortgage?

The major difference between a home equity loan and a reverse mortgage is that you get to eliminate debt and eliminate monthly payments.

Less debt and additional cash from a reverse mortgage mean extra padding in your retirement fund.

A reverse mortgage lowers your stock losses in a down market

Imagine pulling money out of a 401k at a loss in a down market just to pay your mortgage.

A reverse mortgage helps you delay pulling money out of retirement savings during a recession before your retirement accounts start to recover.

You can leave your 401k alone while you access the cash from your home with no repayments required.

A reverse mortgage can help you downsize your home

If you’re unhappy with your current home or simply need a smaller space, you can sell your home and use a reverse mortgage to purchase a new home that you intend to stay in long-term.

The requirements for a reverse mortgage for purchase are similar to a reverse mortgage, but for a purchase, you will make a large down payment (usually 45-70% of the loan amount).

You will never have to make a monthly payment on your reverse purchase as long as you remain in the home and pay your taxes and insurance.

Downsizing with a reverse mortgage for purchase not only allows you to purchase a home for less than a cash purchase or forward mortgage but allows you to cut utility costs and maintenance costs in your smaller home.

Here’s a quick comparison:

• If you purchase a $250,000 home with cash, you’ll be responsible for the full amount plus closing costs and fees
• If you purchase the same home with a forward mortgage, your down payment amount will be only 20%, but you will have to repay the loan in full with monthly payments
• If you purchase the home with a reverse mortgage, you will put down 45-70% depending on your age, interest rates, and the home value, but the rest you will not be responsible for repaying

The reverse mortgage option provides borrowers with a larger amount of savings for retirement and a larger profit from the sale of their old home.

Related: Using A Reverse Mortgage to Downsize

How do you get a reverse mortgage?

The most common type of reverse mortgage is the home equity conversion mortgage or HECM. HECMs are backed by the U.S. Department of Housing and Urban Development (HUD).

To qualify for a reverse mortgage, you’ll have to meet certain requirements from both the HUD and your lender.

Requirements include:

• Age 62 or older
• At least 50% equity in your home
• The home must be your primary residence
• Single-family homes, condos, townhomes, and other HUD-approved properties
• Down payment amount from 45-70%, depending on your age, current rates, and home value
• Must take HUD-approved reverse mortgage counseling
• Responsible for paying closing costs, fees, taxes, and insurance
• Must meet minimum credit score, income, and asset requirements set by the lender

You have three main ways to access your equity with a reverse mortgage:

• Line of credit
• Monthly payment
• Lump sum

Each method has its pros and cons based on your unique financial needs in retirement.

For example, a lump sum withdraws all your funds at once and has a fixed rate, but you’ll have higher costs from the interest and fees. Plus, you may have access to a lower amount compared to your other options.

A line of credit and monthly payment have lower costs than a lump sum, but they come with adjustable rates.

The two options — a line of credit and monthly payment — also can be combined.

When do I repay the loan?

The idea of no monthly mortgage payments might seem confusing to borrowers who are used to a traditional forward mortgage.

But reverse mortgages don’t have to be repaid until one of the following happens:

• You move out of your home
• You sell your home
• You pass away
• You stop paying your taxes or insurance
• You stop maintaining the home

Otherwise, you get to access the benefits of this loan type with no required monthly payments.

That’s what can make this loan an ideal option for seniors who need to cut costs in retirement.

How does a reverse mortgage affect my heirs?

You want to live comfortably in retirement, but naturally, you may feel concerned about what will happen to your children once you pass away and the reverse mortgage balance is due.

In a worst-case scenario, you would owe more on the home than it’s worth. But as long as you have a HECM, your heirs will not be responsible for any shortfalls.

HECMs and HECMs for purchase are backed by the HUD, so your family is protected.

If a shortfall were to happen, your children or spouse can simply give the home to the lender.

Otherwise, they have the following options:

• Sell the home and pay the loan balance
• Purchase the home with a new mortgage or with cash
• Refinance the mortgage

If your home’s value is higher than the mortgage balance, your heirs can keep the difference if they choose to sell it.

FAQ

Find out if a reverse mortgage can help you cut costs in retirement

If a reverse mortgage can make your life better in retirement and the pros outweigh any additional costs, it may be the right fit for you.