If you’re like many older Americans, you’ve worked hard and saved money, but you may still have concerns about having enough to live comfortably throughout your entire retirement. If you’re retired, or close to retirement, the wealth amassed in your home equity likely represents a large portion of your net worth.
Understanding how to strategically and tax efficiently incorporate this wealth into your retirement plan may be the key to prolonging and protecting your overall portfolio. How we plan to fund our longevity is very different today than in decades past. Historically, many companies provided lifetime pensions, which provided retirees with certainty and peace of mind. Today, medical expenses, longer life-spans, long-term care needs and other issues have left many older Americans in Baltimore worried about the possibility of outliving their money.
Yet, older homeowners have amassed an unprecedented $7.14 trillion in untapped home equity as of the first quarter of 2019. (Source: National Reverse Mortgage Lenders Association and Risk Span) This begs the question: Is it reasonable to ignore your largest asset when developing a financial plan?
Simply put, a reverse mortgage loan enables homeowners age 62 or above the ability to borrow up to roughly 50 percent of their home’s value. Payouts can be made to the borrower in the form of a lump sum payment, line of credit with a guaranteed growth rate, monthly payouts or a combination of all three. (We’ll touch on how the line of credit grows in a future article.)
A reverse mortgage may also be used to purchase a home. The HECM for purchase loan combines a reverse mortgage with the equity from the sale of your previous home – or from other savings and assets – to buy your next primary home in a single transaction. Regardless of how long you live in the home or what happens to your home’s value, you only make one initial down payment towards the purchase, provided that you pay property taxes and homeowner’s insurance, and maintain the property.