The options include staying in your current home, downsizing to a smaller home, relocating to another city to be near family, moving to a different climate, moving in with children or other family members, and more.
During retirement, many people look for ways to offset costs and make the most of their hard-earned savings as cash flow can be challenging at this time.
For those who have lived in their homes for a considerable amount of time, there is likely a substantial amount of equity, which can be accessed in several ways. Two common options for retirees are a reverse mortgage or selling the home.
We will examine both options carefully and weigh the pros and cons to help you determine which one makes the most sense for your situation.
Understanding a Reverse Mortgage
The Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage. It is insured by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD).
A HECM reverse mortgage is a unique financial product specifically designed for older homeowners aged 62 and over. It’s a loan just like a traditional mortgage loan, but how a reverse mortgage works is very different.
With a reverse mortgage loan, homeowners borrow against their home’s equity, but they are not required to make monthly mortgage payments on the money they receive.
The lack of monthly mortgage payments that typically come with a regular mortgage is one of the ways a reverse mortgage helps to free up cash.
The money from a reverse mortgage will first pay off the existing mortgage, if there still is one. For the remaining cash, homeowners can receive the funds in the form of a lump sum, monthly payments, a line of credit, or combine those options.
With HECM loans, there are no restrictions on how the money may be used, and how you decide to have your funds disbursed will be based on your needs.
For example, receiving your funds as a lump sum may be the best option if you have major home renovations that you need done. Monthly payments may be the best option for you, if your primary need is to supplement your monthly income. If what you’re looking for is to increase your emergency savings, then a line of credit may be ideal.
The amount of money you receive will be based on three main factors: your age, your home’s appraised value, and the interest rates. The current FHA lending limit is $1,089,300.
However, for homes that are worth more than that, most major reverse mortgage lenders offer proprietary reverse mortgages also known as jumbo loans. At Mutual of Omaha Mortgage, we offer the HomeSafe reverse mortgage, which allows homeowners to borrow up to $4 million.
The loan is repaid or becomes due when a maturity event takes place such as when the homeowner sells the home, no longer lives in the home full-time, or passes away. A reverse mortgage is a non-recourse loan, which means that you will never owe more than the home’s value.
Eligibility Requirements for Reverse Mortgage
Just like any other financial product, there are eligibility requirements reverse mortgage borrowers need to meet. These include the following:
- You must be at least 62 years of age
- The property in question must be your primary residence
- You must have sufficient equity in your home
If you are unsure about whether you qualify, the best way to make sure is to talk to one of our reverse mortgage specialists.
What are the Benefits of a Reverse Mortgage?
One of the most significant advantages of a reverse mortgage is that it allows homeowners to maintain possession of their home while still accessing their equity. This is ideal for those who want to retire in place.
In addition, it eliminates monthly mortgage payments while potentially giving homeowners access to additional cash.
Several retirees find themselves living on a fixed income, which can make it difficult to cover monthly expenses, pay off debts, pay for medical bills, and any other unexpected expenses.
A reverse mortgage can make a significant difference in helping homeowners to offset those costs.
A reverse mortgage can also be used by retirees to supplement their income if they don’t want to take out their retirement savings when the market is in a downturn.
Selling Your Home: Is it a Good Idea?
An alternative way to receive your home’s equity is to put it up for sale and keep the profits.
After selling, you can opt to rent or move in with family members (if that is an option for you) or relocate to a community where there are homes in communities where the upkeep is included.
If you are looking for a way to retire without the burden of homeownership, this might be an ideal solution. If you decide to obtain a reverse mortgage, you will still need to pay property taxes, homeowners insurance premiums, keep up with home maintenance, and pay any HOA fees, if there are any.
Selling your home could be a great idea if you are seeking to significantly reduce your living space or move to an area where housing costs are much lower than what you pay now. If the value of your home is high enough, then you may be able to generate enough funds from the sale that would enable you to purchase a new residence with cash, free of any mortgage obligations.
However, it is important to remember that even if you sell your home, you do have to live somewhere, so you will want to weigh the costs.
Reverse Mortgage vs. Selling Your Home: Weighing Your Options
The final choice between a reverse mortgage or selling your home will come down to evaluating your personal situation and needs.
If you’re planning to remain in your current residence and need extra funds for income support, money for major home repairs or renovations, or an emergency fund, then a reverse mortgage could be the optimal solution.
If you’re ready to move on from owning a home and gain some return on your investment, then selling your property could be the best option.
If you would like to sell your current home and purchase a new home, and you like the idea of retiring without monthly mortgage payments, another option to consider is a reverse mortgage for purchase.
Whenever making a decision that has financial implications, such as selling your home or obtaining a reverse mortgage, it’s important to speak with a financial advisor and the family members who may be affected by your choice.
What to Do Next
If you decide that you want to sell your home, your next step will be to reach out to a real estate agent to help you with your home sale.
If you decide that you want to pursue a reverse mortgage, your next step is to talk to a reverse mortgage lender.
Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.