I’m not an envious guy by nature. However, I can count on one hand the times in my life that I’ve had a full-blown case of the “envies.”
One of those moments came when I was much younger – maybe in fourth or fifth grade. I remember dialing through the channels one evening and stumbling upon an episode Magnum P.I. I was introduced to the crime-fighting, Hawaiian shirt wearing, and rugged good-looking private investor, Tom Magnum, who was played by Tom Selleck.
I was envious of Tom Selleck. And, maybe more honestly, I was jealous of Tom’s mustache.
Tom’s been sporting the stache for over five decades and it has undoubtedly helped him become a household name and envy of many. If you’re honest with yourself, you know it’s true. It’s pretty iconic.
These days, Tom has traded in the unbuttoned Hawaiian shirt and the Detroit Tigers hat for the more conservative look. After all, he’s now the spokesman we all see on television ads for American Advisors Group (AAG), the largest reverse mortgage lender in the entire industry.
If reverse mortgages are good enough for Tom to lend his talent to, are they suitable for the average retiree?
What is a Reverse Mortgage?
A reverse mortgage is a loan available to people over the age of 62. It is used as a way to convert home equity into cash or cash payments.
The reverse of a reverse mortgage is a forward mortgage (makes sense, right?). A forward mortgage is what you’ve had if you’ve ever been a homeowner – you build equity in your home by repaying the loan over time.
Reverse mortgages are the opposite. Reverse mortgages are not repaid every month. Instead, the loan is repaid when the borrower sells the home, vacates the property, or passes away.
Since the equity is taken out as cash, your debt will increase while your home equity decreases.
Is a Reverse Mortgage Right for Me?
A reverse mortgage could actually be a good thing for you. Here’s why.
You no longer need to make your monthly loan payment.
For many retirees that still have a mortgage loan payment, this expense is typically their highest line item in the monthly budget. Eliminating this monthly expense could help you achieve your retirement goals faster while alleviating some withdrawal pressure that your retirement accounts are suffering from to cover this expense.
Consider viewing your home as an asset that works alongside your investment and retirement assets. Both assets will impact your future in one way or another. For the portfolio, spending reducing the remaining balances and sacrifices subsequent growth on the investments. For the home, spending a portion of the home equity surrenders future legacy through the increase of the loan balance.
You retain ownership of your home.
When you take a reverse mortgage, the title to your home remains with you and you continue to live in the house. You must continue to pay for repairs, property insurance, and taxes. When you move out, sell the home, or die (or the last surviving borrower dies), you or your estate will need to repay the loan. This repayment of the loan is typically made by your heirs when they sell the home.
If there is any remaining equity in the house, this will belong to your heirs. If you sell the home and the proceeds are not sufficient to cover the loan balance in full, you will not be required to pay any more than the sale price of the home. And, no, the lender cannot take your home if you outlive the loan, as long as you continue to live in the house and don’t undermine the value of the property.
Equity can be taken out as cash.
Reverse mortgages can create an environment where liquidity is created in an otherwise illiquid asset, which can be used to help support (or enhance) your income plan. Money can be taken out of the home as a lump sum, a monthly annuity (income stream for a guaranteed period or your lifetime) or as a line of credit from which you can withdraw money on an as-needed basis.
Think about the possibilities that this could provide you.
Let’s say you want to go on a cruise. Instead of withdrawing from your IRA account (which is 100% taxable) to pay for it, you could use tax-free proceeds from a reverse mortgage. And they won’t affect your Social Security or Medicare benefits.
Drawbacks of Reverse Mortgages
Just because Tom (and his mustache) is hocking reverse mortgages, doesn’t necessarily mean you should get one.
While there are certainly benefits to considering a reverse mortgage, there are a couple of drawbacks that need to be considered.
- Costs. Closing costs for reverse mortgages are typically higher than a conventional loan, which can make the loan expensive.
- Effects on Benefits. Income from a reverse mortgage could affect your eligibility for supplemental Social Security or Medicaid.
If you’re seriously considering a reverse mortgage, it’s highly recommended that you consult with your financial and tax advisor first.