Is a Reverse Mortgage Right for You?

Are you worried that you’ll run out of money during your lifetime? Are you uneasy about the flat stock market and low interest rates? Would you like a source of guaranteed retirement income in addition to your Social Security benefit and pension? If you answered “yes” to any of these questions, a reverse mortgage is an option that may be suitable for you.

Your home is often your most valuable asset, but until recently, it was an illiquid asset (an asset that is difficult to sell because of its expense, lack of interested buyers or some other reason) and provided you with money only after it was sold. A reverse mortgage helps tackle this issue. Simply, a reverse mortgage allows older homeowners to convert the equity in their primary residence into a liquid asset, be it a stream of income, lump sum or for deferred use. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. Cash accessed through a reverse mortgage is tax-free and does not impact regular Social Security and Medicare benefits, although it may affect eligibility for other government programs such as Medicaid.

To be eligible for a reverse mortgage, you must be at least 62 years old and must either own the home outright or use the proceeds of the reverse mortgage to pay off the balance of the existing mortgage. You retain ownership of the home, are responsible for its maintenance and continue to pay your property taxes and insurance.

Here’s a simple reverse mortgage example for a 65-year old couple. Let’s say they own a home valued at $250,000 and have completely paid it off. If they choose monthly lifetime payments, they would receive about $672 per month or $8,065 annually. Again, this is tax-free income.

Another option is to defer receiving any income and receiving interest on the amount they borrowed. If that couple did so, based on current interest rates, their account would be worth $193,500 in 10 years. This option would be suitable for someone who does not need immediate income but wants some assurance that there will be income for them in the future.

Reverse mortgages are complex financial instruments, and you must carefully weigh the pros and cons before applying for one. Below is a list of pros and cons from Investopedia, the world’s leading source of financial content on the web.

Pros
• You can often choose how the cash is paid to you: a single lump sum, a regular monthly cash advance, a line of credit where you decide when and how much of your available cash is paid to you, or a combination of these methods.
• Regardless of how the cash is paid out, you normally don’t have to pay anything back as long as you (or any co-owners) live in the home as a principal residence.
• There is no required minimum income to qualify (because you don’t have to make monthly repayments).
• If you receive more payments than your home is worth (i.e., you “outlive” the loan), you will not owe more than the value of the home, according to the Federal Trade Commission.
• Cash advances are typically non-taxable.
• You maintain the title to the home (you remain the owner).
• If you have a federally-insured Home Equity Conversion Mortgage (HECM), you can live in a nursing home for up to 12 months before the loan becomes due.
• Cash advances typically do not affect your Social Security or Medicare benefits.
• After the home is sold and the lender fees are paid, any equity left in the home goes to you or your heirs.

Cons
• You must be at least 62 to qualify.
• You must go through (and pay for) mandatory mortgage counseling.
• Loan origination fees and closing costs can be expensive (these fees can be rolled into the loan and financed).
• You may be charged monthly servicing fees during the term of the mortgage.
• Most reverse mortgages are variable interest rate loans tied to short-term indexes.
• Your debt increases over time as interest is added to the loan balance.
• You cannot deduct the interest until the loan is paid off.
• The loan can become due if you fail to pay taxes, homeowner’s insurance or other expenses.
• There are limits on how big a mortgage you can get, and how much you can borrow during the first year.
• Reverse mortgages use up equity in your home, leaving you and your heirs with fewer assets.

Before exploring a reverse mortgage, you need to ask yourself, “How much home equity do I have?” If the answer is “not much,” then you’d want to look into other options. However, if you’re of the right age without a lot of cash flows and sitting on substantial home equity, a reverse mortgage can be a sweet deal.

If you think you may need access to your equity, talk to a housing counselor or a trusted financial advisor sooner rather than later. A good financial plan created by an advisor keeps you from making hasty financial decisions in an emergency and is designed to give you options–like a reverse mortgage–in your retirement.

Bonds that Go Boom!

Let’s talk about bonds! You scarcely hear or read much about bonds. The stock market, especially in recent days with the Brexit, grabs the headlines all the time. Bonds just aren’t glamorous, but they’re an important part of your retirement portfolio. They provide safety, stability and steady interest payments—three things that will help sustain your lifestyle during retirement. One thing, though, that most bonds don’t offer is inflation protection. And, as you well know, the cost of living tends to rise almost yearly. But there is one kind of bond that adjusts for inflation: Treasury Inflation-Protected Securities or more commonly referred to as “TIPS.”

You see, our economy is managed with mild inflation as part of its strategy, with 3% being the target rate. Think about what a new car, your weekly grocery bill and cable TV cost 20 years ago. I guarantee you that just about everything costs more today. A $50 bag of groceries, for instance, now costs $77 because of inflation. TIPS are unique because they are guaranteed to keep pace with inflation as defined by the Consumer Price Index (CPI), offering more security during your retirement.

To compensate for issue costs, TIPS have two components: the first is the coupon (guaranteed interest rate of the bond) and the second is the inflation premium. To illustrate, if a $1,000 regular government bond was issued with a 3% interest rate, the bondholder will receive a $30 interest payment. However, if there was a 10% rise in the CPI, that bond would have no inflation protection, but TIPS would compensate for the increased cost of living. Now let’s compare the previous bond with a TIPS bond issued with a lower interest rate of 2% and 10% inflation. The TIPS bond holder is given the interest plus a 10% inflation premium which is added to the face value ($1,000) of the bond. So the bond is now valued at $1,100, and the bondholder is paid 2% of that amount or $22 of interest earnings. In this case, the TIPS bondholder out earns the regular bondholder.

Just like there are no perfect people, there are certainly no perfect investments, and this applies to TIPS as well. Some disadvantages are:

• TIPS are issued at lower interest rates than comparable bonds.
• The inflation boost when added to the face value of the bond is taxable (unless you hold TIPS in a tax-favored account).
• If the Fed raises interest rates, but there is no inflation, TIPS will not go up in value.

If you’re diversified, though, TIPS can be an attractive part of your retirement portfolio. In designing a portfolio, you want to have a mix of assets that can move inversely under different market conditions; bonds and stocks work in concert with one another in your portfolio. If you don’t include enough risk (think stocks), your investments may not earn an adequate return to meet your goal. However, with too much risk (think not holding enough bonds), the money may not be there when you need it.

Having the right mix of stocks and bonds can reduce your portfolio risk, your potential losses, and–with TIPS–offer you inflation protection. Sure, bonds aren’t glamorous, but they can play a significant role in achieving your financial goals and a successful retirement.