Most people anticipate retirement as a time of leisure, when they can take a trip, play golf, embrace a lifelong passion such as music or art, or spend more time in the garden and with the grandkids.
But if they’re hurting for money, none of these dreams will be easily realized. A recent study by Banker’s Life & Casualty found that 14 percent of Baby Boomers have no retirement savings, while 55 percent of middle-income Boomers’ retirement accounts have balances under $100,000. That’s not a lot of savings once someone has a significantly reduced retirement income.
But there’s good news: many soon-to-be-retirees do have significant equity in their homes. And both Boomers and older seniors can tap this financial reserve with a reverse mortgage, or Home Equity Conversion Mortgage (HECM), a federally insured program that allows homeowners 62+ to convert some of their home equity into cash to fund their retirement years.
How does a reverse mortgage work? As the name implies, it’s like a traditional mortgage in reverse: instead of making a mortgage payment each month, the accrued equity in your home pays you. There are a variety of types of reverse mortgage loans to suit different needs (in fact, the entire reverse mortgage program is being overhauled in October 2013, so specific options will shift).
Here are three key elements in the reverse mortgage timeline:
- 1961: The first reverse mortgage is created by a savings and loan executive as an act of kindness, to help a struggling widow make ends meet;
- 1989: Reverse mortgages become a federally insured program through the Housing and Community Development Act, signed into law by President Reagan;
- 2000: HUD (Department of Housing and Urban Development) begins requiring third-party reverse mortgage counseling as a consumer safeguard. Shortly thereafter, telephone counseling, in addition to in-person counseling, becomes available.
As longevity continues to rise, people also worry about “outliving” their money. There’s good news here, too:
- A homeowner can’t “outlive” a reverse mortgage loan. As long as at least one borrower (that is, a person 62 years of age or older, whose name is on the title to the house) remains living on the property, and pays the property taxes and insurance on time, they can stay in the house for the rest of their life — even if the loan balance exceeds the value of the home!
- The reverse mortgage never has to be repaid by the borrower, unless and until the last property owner decides to move or sell, or vacates the home for more than one year. In practical terms, this means that if your spouse needs to move into an assisted living facility, for example, the reverse mortgage remains in effect as long as the other spouse a) is named on the title and is 62+ b) lives in the house c) maintains it adequately and d) pays the property taxes on time.
So the real question then becomes: how can a reverse mortgage help seniors remain independent?
- It allows them to remain in the home and community they may have lived in for decades, rather than have to move;
- It provides a nest egg for future health care expenses, because every penny is no longer tied to mortgage payments. A reverse mortgage may mean a smaller inheritance for your offspring, but most adult children would agree that mom’s or dad’s needs come first. After all, it’s their house, and very likely the one in which they raised those same children;
- It enables seniors to “age in place” with the use of community resources (such as in-home assistance ranging from companions to home health aides to skilled nursing visits) and home modification, which can include something as simple as installing grab bars in the shower or a wheelchair ramp, to a more accessible kitchen remodel and stair lifts for hauling groceries, laundry — or people.
Below are seven guidelines to help you decide whether aging in place makes sense for you, and if so, whether to explore a reverse mortgage. Aging in place can serve a senior well if:
- You have sufficient equity in your home to qualify for a reverse mortgage;
- Your health is generally good, and you are mobile (physically able to get around);
- You have a network of local family, friends, and neighbors;
- You drive, and alternate transportation is readily accessible;
- You live in a safe neighborhood;
- Your home can be modified to address changing needs;
- You’re well connected and able to reach out for social support.
Home holds deep meaning for most of us. Being able to remain “at home” in familiar surroundings thanks to a reverse mortgage can be a financial boon for seniors as they plan for the rest of their lives.
About the Author:
Amara Rose is a personal and business coach with a broad background in health and positive aging. She writes widely about senior housing, elder health and nutrition, lifelong learning and the spiritual dimension of aging. Contact Amara via email [email protected]