Saving for retirement can be tough. But if your home is worth more than you paid for it, you may have more options.
Last year, Americans aged 62 and older had a record $7 trillion in home equity, says the National Reverse Mortgage Lenders Association.
As a result, a growing number of financial experts suggest that older Americans seriously consider tapping their home equity as a way to achieve a more secure retirement.
“Home equity is the largest single asset for most American retirees, and simply ignoring it as a source of retirement income is neither smart nor in a retiree’s best interests,” says Jamie Hopkins, a professor and retirement income program director at The American College of Financial Services.
Reverse mortgages are more appealing
One option that’s become increasingly viable is a reverse mortgage, best described as a mirror image of a traditional home loan.
When you take out a reverse mortgage, your home is the collateral for the loan. But unlike a traditional home loan, a reverse mortgage requires no monthly payments. You must be 62 or older to qualify.
You can get the money up front or in installments, and you get to stay in your home as long as you want. The loan is repaid when the home is sold—usually when the borrower goes into nursing care or dies.
Advice about reverse mortgages used to come laden with warnings about high fees and overly complicated rules. But today’s reverse mortgages are drastically different than those of decades past—and even ones from just a year ago.
Lower fees and revised rules
The vast majority of reverse mortgages today are government-insured Home Equity Conversion Mortgages, better known as HECMs.
“Since the money is a loan, it is tax-free and does not affect Medicare premiums or how Social Security benefits are taxed,” says Alicia Munnell, the director of the Center for Retirement Research at Boston College and co-author of Using Your House for Income in Retirement.
While the amount you can borrow depends on your home’s value, your age, and the interest rate on your loan, the maximum amount is $679,650 ($726,525 in 2019).
You can receive HECM funds as a lump sum, as monthly payments, or as a line of credit, so you can use the funds to supplement your regular income, regularly or irregularly, or to pay down debt.
As with any other mortgage, with a HECM you can still expect to initially pay various types of fees, including a loan origination fee of up to $6,000, an initial mortgage insurance premium of 2% of the home’s value, at least one appraisal fee, and closing costs on the loan.
That’s still a big chunk of change. But new Federal rules dictate that people who take out less than 60% of the loan in the first year pay only 0.5% in annual mortgage insurance premiums, much less than was previously charged.
Lenders are also now required to assess a homeowner’s “residual income” after paying basic expenses, to help ensure that a prospective borrower has the ability to pay property taxes and homeowner’s insurance premiums.
You can find a list of HECM counselors and approved lenders here.
New reverse mortgage options
While the government insures the vast majority of reverse mortgage loans, private options are slowly becoming more popular. One noteworthy new option is the so-called proprietary reverse mortgage.
These loans are also dubbed “jumbo” reverse mortgages because they let homeowners with more expensive properties borrow much larger sums than the loan limits set for HECM loans—in some cases, the ability to access up to $4 million in equity.
Other innovations include allowing borrowers as young as 60 to take a reverse mortgage (where permitted by state law), loans with very low up-front costs, and even a reverse mortgage loan that does not have to be the primary loan on your residence.
“It’s a really interesting innovation,” says Peter Bell, president and CEO of National Reverse Mortgage Lenders Association.
Who should consider this loan
Despite the new regulations and innovations, reverse mortgages are absolutely not the right solution for everyone.
Fees remain high. And you’ll essentially be draining your home equity, meaning that you wouldn’t be able to use it later on to pay for, say, assisted living. In addition, you may not be able to leave your home to your heirs.
But if you want to remain in your home for the long-term and can afford to pay your property taxes and homeowners insurance, a reverse mortgage shouldn’t be overlooked. Says Munnell: “It can be a very sensible way to increase retirement income.”