You’ve saved your entire life for retirement.
What if the stock market drops 50% the day before you retire?
Countless similar stories played out in the wake of the 2008 housing crisis. Heaven forbid something similar happens in the 2020s, but anything is possible.
So, how do you protect your retirement savings from a recession? One creative solution that not many people talk about is a reverse mortgage.
There are smart ways to protect your assets such as converting more into cash and bonds as you near retirement.
While we won’t go into those methods (you should meet with your financial advisor for that), we will show you how to leverage your home equity to protect retirement savings.See if a reverse mortgage can help preserve your assets in retirement.
A reverse mortgage allows seniors 62 or older to access the wealth they have accumulated in their homes.
It can serve as an alternate source of income while you wait until the markets bounce back.
That way, you don’t have to draw money from IRAs and 401ks that are at 50% of their previous value. You don’t lose money until you sell in the stock market.
Financial experts consider reverse mortgages a “repositioning of wealth” — a tool that helps you access cash that’s already yours during periods when money is tight.
The amount of cash you’re eligible to receive depends on the following factors:
- Age (generally, the older you are, the more you’ll be able to borrow)
- Current interest rates
- Value of the home
Borrowers must have a significant amount of equity in their homes to qualify. You can access the cash either as a lump sum, line of credit, or monthly installments.
The key that makes reverse mortgages so unique is that unlike a home equity loan or traditional mortgage, you don’t have to pay it back until you leave the home or sell it.
With a reverse mortgage, you eliminate your monthly mortgage payment and other debts by tapping into your home equity.
As the name implies, reverse mortgages work in reverse. Making payments on a traditional forward loan contributes to your equity, while a reverse mortgage pulls from your equity to provide you with cash.
It wouldn’t make sense for borrowers 62 or older to sell their stocks at a loss just to make their mortgage payments when they have access to a reverse mortgage.
Lower monthly obligations will minimize your expenses during retirement and allow you to draw less from savings.
Fewer expenses mean you can pay down any outstanding debts, and your income can go straight to where you need it most.
Reverse mortgages also have a purchase option that can help you find the right home for aging in place.
With a reverse mortgage for purchase, you put down 45-70% (depending on a few factors) and never have a mortgage payment on the new home.
Downsizing may be necessary for many reasons, including:
- Your home is too large and too expensive for your budget
- Your home is a hazard for falls or needs consistent maintenance
- You want to move closer to your family or friends
- You’ve experienced a major life change, such as the loss of a spouse, a divorce, or a marriage
- You’d like to relocate to a more favorable climate or a safer neighborhood
Not many people experiencing these scenarios are able to qualify for a conventional mortgage to move, nor can they afford to pay for a new home with cash.
Additionally, a new monthly mortgage payment or paying for the home with cash both will drain your retirement savings.
You can use the proceeds from your current home sale to cover the down payment, and the rest is covered by your reverse mortgage purchase.
Downsizing with a reverse mortgage also offers additional savings in the form of lower insurance and utility costs and less maintenance.
If you’re planning to downsize anyway, you might as well use a reverse mortgage to purchase and eliminate that payment in retirement.See if a reverse mortgage can help preserve your assets in retirement.
A reverse mortgage isn’t the right fit for everyone’s retirement strategy, but it can be a helpful solution for those who plan to stay in their homes.
The bottom line: If a reverse mortgage wouldn’t make your life easier or offer you enough cash to meet your needs, it may not be for you.
To help you determine whether a reverse mortgage suits your goals, let’s take a look at the loan requirements:
- Age: 62 or older
- Equity amount: Generally more than 50%
- Down payment amount: Ranges from 45-70%, depending on your age, home value, and current interest rates
- Status: Home must be your primary residence
- Financial requirements: Must be able to pay property taxes and homeowners insurance, continue maintaining the home, and cover closing costs and fees
- Property types: Single-family homes, condos, townhomes, and other properties depending on the lender
- Other: Must take reverse mortgage counseling
The most common reverse mortgage is a home equity conversion mortgage (HECM), which is backed by the U.S. Department of Housing and Urban Development (HUD).
HECMs offer more protection to borrowers and protect heirs once the homeowner has passed away.
If you qualify for a HECM, you should be able to pay off what’s left of your current mortgage (if any) and take out the rest in the method you and your lender agree on.
A HECM for purchase covers the remaining amount on your new home once the down payment is made, and any cash left from your approved amount is yours.
The loan repayments are not due until or unless one of the following occurs:
- The borrower sells or leaves the home
- The borrower decides to pay back the loan
- Borrower breaks loan agreement by not paying insurance or taxes or not maintaining the home
- The loan reaches maturity
- Borrower passes away
A reverse mortgage is best for borrowers who intend to use it long-term — ideally for the remainder of their lives. This makes the high down payment amount and fees worth it for most borrowers.
Carefully weigh the pros and cons with a trusted loan officer and loved ones to determine the best course of action.
No. It’s a non-recourse loan, meaning heirs are not responsible for shortfalls if the home value drops below the loan amount. Instead, they can choose to hand over the property to the loan servicer.
Yes, you can refinance or sell your home in the future with no penalties. Refinancing can potentially allow you to lower your interest rate or increase the amount of cash you are eligible for.
If you plan to sell your home soon or move to an assisted living community, the costs and fees associated with a reverse mortgage likely won’t be worth it.
Yes, the reverse mortgage borrower still owns their home. It may seem odd to still own your home when you aren’t making any monthly payments, but that is how this loan type is designed to work: in “reverse” rather than “forward.”
A reverse mortgage can be a helpful — if not essential — part of your retirement strategy, especially during a recession. Why not take advantage of the loan options you’ve earned as a senior?
Start the process today to discover if it’s right for you.Find out if you qualify for a reverse mortgage.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.