Research estimates more than 50 percent of households lack enough retirement funds to maintain their pre-retirement standard of living—even if they work until 65.
The good news? If you’re a homeowner, you have options:
Reverse Mortgage – A reverse mortgage is a loan that homeowners aged 62 or older can use to convert part of the equity in their home into a usable asset, without giving up title or ownership of the house.
The reverse mortgage option should be viewed as a method for responsible retirees to create liquidity from an otherwise illiquid asset. Reverse mortgages require no monthly payment and do not have to be paid off until the last borrower permanently leaves the home. You have the option of taking the loan proceeds as a lump sum, a fixed monthly or tenured payment, or as a line of credit.
Reverse mortgages also feature a non-recourse provision that protects you from ever owing the lender more than the value of your home, even if the house is "underwater" when you are ready to sell.
You are still responsible for paying your property taxes, homeowner's insurance and upkeep expenses, or risk the loan being called due and payable.
Home Equity Line of Credit (HELOC) – A HELOC establishes a line of credit based on a percentage of the value of your home. You can access this credit during a predetermined amount of time called a "draw period," usually 10 years. During the draw period, you can borrow up to the designated amount while making monthly interest payments, and, if you choose to pay back on the principal, you can draw out again, much like a credit card.
After the draw period, you are responsible for repaying the principal and interest either immediately or over a set period of time, depending on the terms of the loan. You should be aware that if your home value depreciates, or if your financial circumstances change, the lender has the right to freeze your credit or even cancel your loan.
Cash-Out Refinancing – Cash-out refinancing allows you to refinance an existing home loan—hopefully at a lower interest rate—and also refinance the home for a dollar value higher than the remaining principal. This loan allows you to keep the money above the principal as liquid cash that can be used to pay down other expenses or fund your retirement.
Like your original forward mortgage, if you miss a monthly payment due to unanticipated expenses from a health care emergency or other life disruption, your loan could be called due and payable, and the lender could move to foreclose on your property.
While all three plans have their benefits, new consumer safeguards for reverse mortgages are fueling their popularity among seniors who want the benefit of no monthly payment, a loan that can't be canceled or reset, and the option of a line of credit that increases over time.