Reverse mortgages are designed to allow you to access the equity in your house, while continuing to live in your home without ever having another mortgage payment. A home can often be the largest asset most Americans own. However, it is a non-performing asset because your money is invested in the home. You, generally, cannot tap into your home equity without selling the home or borrowing against the equity.
After the downturn of 2007-2009, many investors saw their retirement assets cut significantly. When cash flow projections indicate that your assets might not last through your lifetime, you may need to access the equity in your home.
Let’s look at an illustrative example of Albert and Bea (names changed to protect the innocent), who are both 67 years old. They own a home valued at $350,000 and owe $150,000 on their mortgage. Their mortgage payment is $1,200 a month with 15 years left on the mortgage. Bea has been a homemaker for the last 30 years, and Albert retired at the age of 65. To keep their retirement comfortable, Albert and Bea were drawing $1,200 a month from their managed assets, thereby reducing their retirement portfolio by $14,400 a year. At this rate, their assets might not last their projected life expectancy. A cash-out refinance might not be the answer, because they would still have a mortgage payment. They don’t have an immediate need for the cash, but need to improve their cash flow over the long term. Additionally, they have no desire to move into a smaller, less expensive home. In their unique situation, a reverse mortgage could work to their advantage.
By working with a financial adviser, Albert and Bea considered a reverse mortgage as a way to eliminate the house payment while remaining in the home. Based on their age, the value of their home, and the current interest rate, let’s assume they qualify for a reverse mortgage that pays off their first mortgage. They should have approximately $58,000 left over from the reverse mortgage in a growing line of credit. Ideally, Albert and Bea could stop drawing down their investment account, because the money they could save by not having a monthly mortgage payment should supplement what they had been using from their savings.
By not drawing $1,200 a month for the next 15 years, Albert and Bea essentially kept $216,000 in their investment account. Including the $58,000 from the reverse mortgage adds a total of $274,000 to their cash flow that wasn’t there previously. Ideally, they can continue to invest the $274,000, thus turning their non-performing asset into something that could potentially earn a return.
A reverse mortgage is not a solution for every situation. Many financial advisers avoid recommending reverse mortgages because of the unique circumstances needed to make them work, including the age of the borrowers, the interest rate available and the appraisal price of the home. These are in addition to the borrower’s projected cash flow and expected rate of return on the investment.
At Henssler Financial we believe you should Live Ready, which includes understanding a mortgage product and if it is right for your situation. If you have questions about using a reverse mortgage to augment your retirement, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
