How Your House Can Save Your Retirement

Worried you’re going to run out of cash in retirement? The solution to your problem may be closer than you think.

After Joyce Ruvolo’s husband passed away two years ago, she noticed a disturbing trend. “I found myself taking money out of the bank every month to pay the bills,” says the 77-year resident of Boca Raton, Florida.

Unhappy with her cash flow situation, Ruvolo found a solution to her problem with Kathy Burns, a reverse mortgage loan specialist with On Q Financial. Burns helped set up a reverse mortgage, also known as a home equity conversion loan, which allowed Ruvolo to tap into the equity in her house and receive regular payments to supplement her income. “Kathy was wonderful, and the e
extra money I have in my pocket at the end of the month makes up the deficit I had before,” she says.

Ruvolo’s situation isn’t unique, and finance experts say the biggest asset many seniors have is their home. By leveraging its value, those who are facing the prospect of afinancially rocky retirement may find they can live comfortably instead.

Using a house as a retirement fund. With traditional pensions disappearing and Social Security payments remaining relatively flat thanks to the current low-interest economic environment, some say home equity is the logical place to look for money in retirement. “Where have they saved most of the money in their life?” says Jamie Hopkins, an associate professor of taxation at American College and co-director of the New York Life Center for Retirement Income. “It’s in their home.”
To tap into the value of their house, seniors could use one of the following products or strategies:
  • Reverse mortgage
  • Home equity line of credit
  • Downsizing
  • Home-sharing
Of these, reverse mortgages may be garnering the most attention. These loans allow seniors age 62 or older to receive payments based upon the value of their home and their age. Once the borrower passes away or moves out of the house, the loan must be repaid, typically within a year. To do so, the house may be sold or the loan refinanced in a conventional mortgage.

Not your 1980s reverse mortgages. While seniors like Ruvolo have warmed to reverse mortgages, others may be reluctant to sign up for a product that, in decades past, gained a reputation for saddling people with expensive loans that were inappropriate for their circumstances. However, Hopkins says that has changed. “It’s not the reverse mortgage that existed in the 1980s.”

Reza Jahangiri, CEO of reverse mortgage lender American Advisors Group, says today’s loans come with consumer protections, such as financial counseling and a financial assessment, which weren’t a part of older loans. What’s more, these are non-recourse loans which means no one will end up paying more than a property’s value. “If the loan amount is greater than the home value, the heirs aren’t responsible [for the difference],” Jahangiri says.

Interest rates may be higher for reverse mortgages than for other mortgage products, and the loans may not make sense for seniors who expect to sell or move within the next few years. However, for those with small retirement funds and limited options, a reverse mortgage may make sense. “We have a mushrooming demographic of seniors, life expectancy is up and the savings picture is not robust,” Jahangiri says. “It’s become a reality that the reverse mortgage has become part of retirement planning.”

Keep communication open with family members. Since a reverse mortgage could require the sale of a family home, seniors should keep their adult children aware of their plans. “It’s very important they discuss it with their family,” Ruvolo says. While children can’t prevent a senior from taking out a reverse mortgage, keeping everyone informed avoids unpleasant surprises during a time of grief.
If family members don’t want to lose the home, there is always an option to do a private reverse mortgage. These loans need to be professionally set up to avoid gift taxes, but they allow an adult child or other family member to make payments to a senior in exchange for equity and eventual ownership of the property. “The caveat is it’s not common for kids to be in a position to advance hundreds of thousands to their parents,” Jahangiri says.

For those who decide not to take out a reverse mortgage, taking out a home equity line of credit, selling a home or downsizing to a smaller residence are all ways to find the cash needed to boost meager retirement funds. “Figure out what you want in retirement,” Hopkins says. “Once you figure out your goals, you can use [your house] to help you meet them.”

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