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How to Turn Home Equity Into a Liquid Tax-Free Retirement Account That Grows

Home equity can serve as a vital component of a solid financial plan for retirement.

September 24, 2016 by HECM Pro

HECM Reverse Mortgage Line of CreditWhat if I said there was a way to turn a large portion of your home’s equity into a liquid and tax-free retirement account that grows larger over time? Would you believe me? If not, I wouldn’t hold it against you at all!

What I want to show you is a financial strategy for retirement that many people, including financial advisers, are completely unaware of. It’s 100% legitimate and is being used by thousands of homeowners across the country today to have a more financially secure retirement. Used prudently by the right candidate, this strategy can be an incredibly powerful and beneficial addition to an already solid financial plan.

Home Equity: The “Worthless” and Unusable Asset

Think about your home’s equity for a minute. How does it make your life better? Whether it’s $500 or $500,000, what real impact does it have on your day-to-day lifestyle? Probably not much, right?

If you’re not planning on selling your home any time soon, the amount of equity you have in your home is pretty much just a number on paper. It might sound like a very nice number, but it has no real impact on your life. Unless you have a way to convert your home equity into cash, you can’t use it to buy groceries or book a plane ticket to Hawaii, right?

Having said that, there’s certainly nothing wrong with having a lot of equity in your home. It’s very commendable to pay off your home in full and no longer have a mortgage payment. In a sense, home equity can serve as a forced savings account that you contribute to with every mortgage payment you make.

The problem with home equity is that it’s an unusable savings account. It can’t normally be converted to cash without either selling the home or doing a cash out refinance and taking on a mortgage payment for many years to come.

However, there is a way you can access your equity without having to give up ownership of your home or take on a mortgage payment – if you’re at least 62 years of age. Even better, you can actually convert a large portion of your equity into what is essentially a tax-free retirement account that is perfectly liquid and will grow larger for you over time.

How? With a reverse mortgage.

Now, bear with me. If you’re like many people, you’ve probably heard few positives about a reverse mortgage. I’ll grant that some of what you’ve heard could be justified, but I guarantee you most of it is not. There is a ton of misinformation floating around out there about the reverse mortgage. My hope is that you’ll have an open mind about the reverse mortgage and how it could fit into your financial plan.

First of all, a reverse mortgage is not just a loan of last resort. It’s not just for financially desperate people who have no other options. Yes, a reverse mortgage can often help people who are struggling, but many very wealthy people take advantage of them too. In fact, if you have a least a modicum of financial stability and don’t need the money right now, you can benefit from a reverse mortgage more than most.

A reverse mortgage also doesn’t mean you give up ownership of your home. Don’t let anybody tell you otherwise! You always remain the owner of your home under the program I’m going to show you.

And even better, a reverse mortgage can turn a significant chunk of your home’s equity into a tax free retirement account that will grow larger over time. No longer is home equity doomed to be just a nice looking number on paper, but otherwise useless when it comes to your daily life.

What is it and How Does it Work?

The reverse mortgage is probably the most misunderstood mortgage product out there. There are a ton of misconceptions floating around about them, so it’s important to get the straight deal on what they are and how they work before you can decide if one is right for you or somebody you know.

The most common reverse mortgage product by far in America today is the Home Equity Conversion Mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it’s likely they got a HECM.

The HECM program was signed into law by President Reagan as part of the Housing and Community Development Act of 1987. Today, the program is overseen and regulated by the Federal Housing Administration (FHA) under the authority of the Department of Housing and Urban Development (HUD). Thus, it is a very legitimate program and very highly regulated. It’s also very popular; over 50,000 HECM reverse mortgages are written every year in America.

A HECM reverse mortgage allows homeowners 62 years of age or older to convert a large portion of the value of their homes into tax-free cash without having to give up ownership of the home or take on a mortgage payment. Your obligation under the program is simply to pay your property taxes and homeowner’s insurance and live in the home. As long as at least one borrower is doing these three things, no mortgage payment is required and you don’t have to pay back any of the money you borrow. The loan only has to be repaid when the last borrower permanently leaves the home, whether through selling, passing away, or moving into a nursing facility.

Again, you always remain the owner the home, which also means you’re free to leave it to your heirs.

Reverse mortgage proceeds can be received tax-free in the form of a line of credit, lump sum, monthly paycheck, or some combination of all of these options. The option I want to focus on here is the line of credit.

Turning Home Equity Into a Tax-Free Retirement Account That Grows

If you owe little to nothing on your home, the strategy I’m about to show you could substantially add to your available liquid retirement assets. As you’ll see, the line of credit option essentially turns a portion of the value of your home into a liquid, tax-free retirement account that will increase in value over time.

The line of credit option is very similar to a traditional home equity line of credit (HELOC), except that no payment is required and you don’t have to pay back any of the money you borrow as long as you meet your obligations under the program.

The best part is that the unused credit line will automatically grow and compound larger with no limit based on an annual growth rate. Understand that there’s no weird and complex financial machinations going on here. The lender isn’t taking money from your equity and investing it for you. They’re simply automatically increasing your available credit line by a certain annual rate.

HECM Line of Credit Scenario 1The growth rate also has nothing to do with home values. The value of your home could fall and your available line of credit will continue to be available and grow as long as you meet your program obligations (paying taxes, insurance, and living in the home).

To see how the growth rate works, let’s take a look at an example. Let’s assume you qualify for an initial credit line amount of $75,000 and the annual growth rate is 5%, which is very reasonable for today’s market. As you can see in Figure 1, your line of credit will have grown to over $95,000 after just five years. After ten years, it will be worth over $122,000.

Because the growth rate applies to your available line of credit, growth compounds on growth. This means that the available credit in absolute dollar terms can really pile up over time.

The growth rate will also keep up with prevailing interest rates. If interest rates rise in the future, which is probably likely, the growth rate will increase as well, which means your line of credit will grow even faster. As crazy as it sounds, higher mortgage interest rates could actually end up being a good thing for you!

Because there’s no limit on how much the line of credit can grow, it’s even possible that the line of credit could grow larger than the value of your home! And because a HECM reverse mortgage is a non-recourse loan, you, your estate, or your heirs are not on the hook for any shortage if the home is worth less than the loan balance.

If your line of credit ends up growing larger than your home’s value, you’ve officially beat the system!

HECM Line of Credit Scenario 2For another example, let’s assume your line of credit starts off at $150,000 and the growth rate is again 5%. As you can see in Figure 2, the growth really adds up quick. After just five years, your available credit line will be worth over $191,000. After ten years, it’s worth more than a whopping $244,000! If you happened to get this line of credit early in your retirement (say at age 62) and left it untouched for 20 years, you’d have just shy of $400,000 available with just a phone call tax-free. That adds up to a lot of financial security in a time of life when in-home care or other medical expenses can be a huge financial burden.

Conclusion

The HECM reverse mortgage line of credit can be a fantastic way to substantially add to your available liquid retirement assets. The line of credit effectively turns a large portion of your home’s equity into a liquid and tax-free retirement account that automatically grows and compounds larger over time. No longer does your home’s equity have to be just a nice looking number on paper that has no real impact on your daily life! No longer is it doomed to remain a financial resource accessible only by selling your home (which means you have to find a new one) or by being stuck with a mortgage payment for many years to come.

If you owe little to nothing on your home and are relatively early in your retirement, the HECM line of credit could benefit you enormously – particularly if you don’t need the money right now. Just get it set up and let it grow and compound over the coming years. By the time you actually need it, you’ll likely have a very substantial amount of money available to you tax free with just a phone call.

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