Reverse Mortgage Scenario
Do you love your home and want to stay in it?
Here’s a few scenarios that may help you understand a reverse mortgage.
Scenario #1: Reduce Asset Distribution Rates
Mark and Lydia are both 66 years old. They own a home worth $800,000 and have $1 million in retirement assets. They would like to retire, however, they have a $300,000 15 Year first mortgage lien with monthly principal and interest payments of $2,100. Because of this, they calculate they will need to withdraw about 6% per year from their retirement assets to cover all of their expenses. Which is well above the 4% rate that most advisors would suggest.
Since a reverse mortgage doesn't require the monthly principal or interest payments, this couple can use the loan proceeds to cover their expenses and lower their asset distribution rate from 6% to 3.5%. Because they will be retaining more of their invested assets, it could help offset any loss of equity from the reverse loan.
One of the main reasons homeowners get a reverse mortgage is to eliminate a monthly mortgage payment. For Mark and Lydia, it was to help preserve invested assets; in other cases, it could simply be to free up monthly cash flow. The extra money can go a long way to help balance the household budget or even pay for other retirement essentials such as a long-term care (LTC) plan.
Funds from a reverse mortgage can be used for several purposes that can both safeguard and enhance a retirement plan. Some of those uses include:
Scenario #2: Utilizing a Reverse Mortgage Line of Credit
Marilyn is a 72-year-old widow. She owns her own home, which she would like to stay in for the rest of her life. She has sufficient income from her investments, pensions, and Social Security, and a hybrid life insurance/LTC policy to manage any long-term care needs.
She has three grandchildren, all of whom will be in college over the next 10 years. She would like to be able to assist with their education expenses, but if she draws down her invested assets to do so, it will not only reduce her future income potential but also cause her to incur income taxes.
A solution for Charlene is a reverse mortgage line of credit, where she can withdraw a projected $40,000 per year, based on her age and the value of her home, for the next 10 years to help achieve her objective. She will make payments directly to the grandchildren's colleges to avoid gift tax liabilities as well. By leveraging her home with the reverse mortgage, she can experience the joy of giving while still alive, with no impact on her current lifestyle.
Scenario #3: Making Home Equity Liquid
Kevin, a high net worth 68-year-old, also wants to use the equity he has in his home now to help his children. He can secure a multi-million-dollar proprietary reverse mortgage for his home which will pay off his existing mortgage and provide enough additional cash for him to purchase outright homes for each of his two children. With no more monthly mortgage payment and the additional cash from the reverse mortgage, Kevin is able to retire and experience the joy of helping his two children get set up in a solid financial position.
Ultimately, given the right circumstances, the reverse mortgage can provide a great opportunity to both fill in the gaps of a retirement plan or facilitate gifting and legacy desires while still living. With home values at record highs and interest rates still at low levels, this could be a great time to secure a reverse to help manage both needs and desires going forward.
Remember with a FHA HECM reverse mortgage you still own your home, you’re still responsible for your taxes and insurance. You can sell the house the equity is yours.
A reverse mortgage is just a loan….how you pay it back, is what makes it different.
Call me for a free review of your situation.