February 27, 2016 by HECM Pro
What if I was to say that you could substantially increase your available liquid retirement assets by tens or hundreds of thousands of dollars with a little paperwork and a few months worth of time? What would that mean for your retirement? What would that mean for your financial security? Believe it or not, it can be done, and a HECM reverse mortgage can make it happen.
Will Your Money Outlive You?
One of the most common concerns I hear from my reverse mortgage clients is that they want to make sure their money lasts for the rest of their life. The idea of running out of money before running out of life is terrifying.
You want your money to outlive you, not the other way around.
If you owe little to nothing on your home, you have a lot of money locked up in your home equity and completely unavailable for your use. Think about it: you can’t take your home equity down to the grocery store and buy a steak with it, right? It can’t be used to buy a nice vacation, redo your kitchen, or help your grandchildren get through college – unless, of course, you’re willing to sell the home (and convert all your equity to cash) or do a cash out refinance and add a mortgage payment to your budget.
Unless you’re willing to move or take on a mortgage payment, your equity really does nothing in any practical, day-to-day sense to enhance your lifestyle or financial security. There needs to be a way to convert equity into cash without having to give up your home or take on a payment.
This is where the reverse mortgage comes in!
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.
Proceeds can also be used to supplement and increase available retirement assets, which means you have a larger liquid nest egg and can worry less (or maybe not at all!) about running out of money.
A Reverse Mortgage as a Retirement Account
One of my favorite ways to structure the reverse mortgage is as a line of credit – particularly for clients that owe little to nothing on their homes. 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.
The line of credit can be a powerful financial tool because the available credit (whatever hasn’t been borrowed yet) will automatically grow larger over time at a compounding rate – with no limit. As long as you uphold your end of the bargain (live in the home and pay required property charges such as taxes, homeowner’s insurance, HOA dues, etc.), the line of credit will continue to grow and compound over time.
There’s no magic here. The lender isn’t taking money from your equity and investing it for you. The line of credit 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 the loan for as long as you own the home. The lender is simply automatically increasing your available credit limit every year by a certain percentage rate.
As an example, let’s assume you qualify for a line of credit worth $150,000. Assuming you receive a 5% growth rate, which is very reasonable for today’s market, the line of credit could grow to over $240,000 after ten years. After twenty years, it could be worth as much as $411,000.
As you can see, the line of credit effectively turns a portion of your equity into a liquid and tax-free retirement account that automatically grows larger over time. You can now use your equity to buy steaks, redo kitchens, or help the grandkids get through college – and you don’t have to sell the home or take on a payment to do it.
If you have a lot of equity locked up in 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 the line of credit set up and let it grow and compound over the coming years. Down the line you’ll have access to a lot more money than you started with, which means you’ll have a lot more money at your disposal to fund your retirement lifestyle.
No Other Mortgage Product Does This
It’s unfortunate that the reverse mortgage still gets a bit of a bad rap because of lingering misinformation and past unscrupulous practices by some lenders. It really is a phenomenal loan product for the right person. No other mortgage product can effectively turn a portion of your equity into a retirement account that grows and compounds over time.
If you’re concerned about making sure you have enough money to last for your entire retirement, the HECM could be fantastic option.
How Much Can I Get?
How much you qualify for depends on the value of your home, the age of the youngest borrower, and what program you select (fixed rate or variable rate). To get an idea of how much you might qualify for, check out our free, no-strings-attached reverse mortgage calculator. Be sure to select the “line of credit” option.