Broker Check

When a Reverse Mortgage is a Good Idea for Retirement Income

Howard Hook quoted on Time.com in Money magazine’s Ask the Expert column
December 17, 2015

The Question: My wife and I are both 54, and we would like to do a reverse mortgage when we’re 62 to help fund our retirement. We do not have any children and there isn’t anyone to leave our home to upon our death. We will both be retired next year and my wife has a pension.

We bought the home for $712,000 in 2005. It was appraised for $600,000 in 2010 when we refinanced. Now that home prices are coming back, we hope to get back to the $700,000 range. We have no mortgage on the home. Is this a good idea? How much could we get if the home is appraised between $600,000 and $700,000? — Larry Foutz, Chesapeake Beach, Md.

The Answer: Reverse mortgages, which allow you to borrow against the equity in your home once you reach age 62, aren’t the right move for everyone. In your case, it may make sense, says Howard Hook, a fee-only certified financial planner and CPA at EKS Associates in Princeton, N.J., but there are a few things you should consider first.

First, a little background. Government-insured reverse mortgages, known formally as home equity conversion mortgages (HECMs), have been around since the late 1980s. They were created by the Housing and Community Development Act to help older homeowners strapped for cash access the equity in their homes. The loan, which can be taken as a lump sum, lifetime payments, or a line of credit, doesn’t have to be repaid until you move out of the house or die.

The loans took off along with the housing boom in the 2000s. In ubiquitous commercials starring the likes of Henry “The Fonz” Winkler and the late Sen. Fred Thompson, reverse mortgages were pitched to retirees as an easy source of money. Too many retirees took the bait, Hook says, then wasted the money on home improvements, vacations, or ill-advised investments. Then, when they needed cash for living expenses, it wasn’t there. “That’s how people get into trouble,” Hook says.

New government rules instituted in the last few years have made these complex products safer and less costly. One change, for example, makes it harder for borrowers to take out loans if they can’t afford the cost of owning the home. A bank can foreclose if you fall behind on insurance and property taxes, something that happened to many seniors during the great recession. Now borrowers must undergo a financial assessment of their income and assets.

In your situation, you should first figure out what your expenses will be once you and your wife retire, says Hook. Use retirement income projection tools to check whether your wife’s pension, your investment income, and eventually Social Security will cover your fixed living costs. If they do, there’s no reason to take out a reverse mortgage now. “If you run short of money later on, you could take out a reverse mortgage then,” says Hook.

You can borrow roughly 50% to 70% of your home equity. But the exact amount depends on your age, the type of loan, and the value of your home. You can estimate how much you can get with the National Mortgage Lenders Association’s calculator. The older you are, the more you can get, so it benefits you to wait. Plus, there are closing costs and fees to set up a reverse mortgage, which can run into the thousands of dollars. That’s money you might not need to spend.

If you do find you need the cash from your home—maybe your healthcare costs go up more than expected, or you have a medical crisis—set up a reverse mortgage as a line of credit, suggests Hook. “You can tap it as needed,” he says.