You may have considered how your home equity can work for you in retirement through the use of a reverse mortgage. Whether you have saved for retirement or not, this type of loan may be able to help, according to a recent study from the Boston College Center for Retirement Research.
A Federal Housing Administration (FHA) insured reverse mortgage, or “Home Equity Conversion Mortgage,” allows borrowers to access equity they’ve built up in their homes. This can be done through a lump sum payment, a series of payments made over time, or a line of credit.
The researchers at Boston College find that many Americans have saved very little for retirement, and to make up for this shortfall, reverse mortgages are one tool they can use to help.
“For many people, even perfect investing is unlikely to have a significant effect on their well-being in retirement,” the center’s researchers write. “Fortunately, people have a number of other levers that can affect their retirement security. And these strategies – unlike the stock market – are within the individual’s control: working longer, using a reverse mortgage to access home equity, and controlling consumption when the kids leave home.”
For most households approaching retirement, the house is the largest asset aside from social security. On average, households nearing retirement have close to $140,000 in home equity, the research shows.
Depending on the borrower’s situation, tapping that home equity through the use of a reverse mortgage could help improve the retirement picture even more than asset allocation, Boston College finds.
“Financial planning tools frequently highlight the asset allocation decision, suggesting that individuals have a lot to gain by adopting a more optimal allocation of stocks and bonds,” according to the research. “In contrast, they are often silent on the benefits of other options, such as delaying retirement, controlling spending, or taking out a reverse mortgage.”
How it works
To be eligible for a reverse mortgage, all borrower’s on title must be at least 62 years of age or older. The home must either be paid off or have a substantial amount of equity. If there is an existing mortgage balance, borrowers can use a portion of the loan proceeds to pay off that balance and eliminate monthly mortgage payments. If there is equity remaining, the borrower can take that equity in the form of a lump sum, monthly payments or they can draw on that equity as a line of credit. The homeowner must continue to pay homeowner’s insurance and property taxes and maintain the home according to FHA guidelines throughout the course of the loan.
How much can be borrowed?
The loan amount depends on the borrower’s age, current interest rates, the amount of equity in the home, and the lesser of the appraised value, sale price or maximum lending limit. In general, the older you are, the more equity you have in your home and the lower your mortgage loan balance; the more money you can expect from a reverse mortgage loan.
Use our reverse mortgage calculator to determine how much you may be able to borrow from a FHA-insured reverse mortgage.
Whether you have traditional retirement savings or are seeking an alternative to drawing upon your retirement savings as noted in the study from Boston College’s Center for Retirement Research, a reverse mortgage may be able to help.