Tap Into Your Property’s Value Without Selling Your Home

Options at Retirement Age and Earlier

Retirement and your real estate's value

The closer we get to retirement age, the more we start thinking about how to avoid pulling from our retirement accounts too early or too much. For many homeowners, home equity is starting to look like a key retirement planning resource. 

What’s the best way to tap into it? Selling for a profit and downsizing is one way. But when home prices are high, it’s not easy to buy another home.

In a reverse mortgage, the lender releases monthly payments to the homeowner. This can keep owners in their homes, free up spending money, and preserve retirement accounts. The homeowner is borrowing the money with the property value as collateral. This means receiving a sum of money or a fixed monthly payment. The full payoff is due at the time of the borrower’s death or at the time the house is sold. As the homeowner doesn’t pay it back monthly, what happens is the home’s value is coming out to the owner in cash that the owner’s estate will address after death. At that time, the beneficiaries will refinance or sell the home to pay off the reverse mortgage.

Why People Get Reverse Mortgages

Reverse mortgages are for homeowners aged 62+. We’re fast approaching the point at which all boomers will be there. Collectively, they have massive amounts of home equity, and some have fully paid-off homes. With home values as high as they are in 2022, a reverse mortgage can mean access to a large amount of cash. This can help fund:

  • Medical or medical insurance needs.
  • Home modifications.
  • Education goals.
  • An early retirement.
  • A new business or creative project.
  • Travel.
  • Retirement needs without tapping Social Security benefits.
  • Credit card debt payoffs.
  • The purchase of a new house.

And if the loan allows the homeowner to keep more money in an individual retirement account, the owner can potentially come out ahead, assuming the stock market does well.

But how much can the borrower actually take out against the home value? The answer varies. The sum available from a reverse mortgage depends on the property value, the borrower’s age, and the loan interest rate.

So, How Does the Reverse Mortgage Work?

The FHA insures the Home Equity Conversion Mortgage (HECM), a popular type of reverse mortgage loan for houses. For starters, the mortgage should be paid off (or have a low enough payoff balance so the reverse mortgage loan satisfies the debt). Then, a homeowner has to meet with an approved counselor, who can offer information and guidance, and connect borrowers with approved lenders

Important note: Watch out for shady agents and lenders; they’re out there! Steer clear of anyone who presses you to take out a loan on the value of your home or to buy another home using home equity financing.

The borrower must be named on the deed. The home must be the borrower’s primary residence. If the home is a multiple-unit home (up to four units), it’s still eligible, as long as one unit is the borrower’s personal living space. FHA-approved condo units and HUD-approved manufactured homes are eligible. Be sure to check with your mortgage specialist for more information on condo approvals and other government requirements.

Payments to a homeowner through a reverse mortgage are not taxable income. But the borrower should expect loan servicing fees and charges for the required title search, lien recording, inspection and appraisal. As with a regular mortgage application, the borrower will need to respond to probing questions about proof of ability to repay the loan. Expect the interest rate to be at least a little higher than the rates on ordinary mortgages.

With a reverse mortgage on the home, the borrower directly pays all relevant insurance and property taxes, and, of course, any homeowner’s association (HOA) assessments and utilities.

Other Options for Mortgage Holders (Including Under Age 62)

The FHA’s cash-out refinance loan is available without regard to age. It’s a way to borrow against equity by replacing the current mortgage with a new, larger loan that pays off the first one and gives the borrower a lump-sum payment. There is no counseling required.

You can also tap your equity through home equity loans or home equity lines of credit. What is the difference between them?

  • A home equity loan pays the owner one upfront sum, with a fixed interest rate.
  • On lines of credit, the borrowers cover an adjustable-rate interest charge (generally up to 10 percent) only on what they use.

Say the borrower’s home appreciates at a 3 percent rate (or more, in hot real estate markets). The higher the expected appreciation, the better a homeowner will hope to offset the interest on the loan, and hold onto equity needed for the estate to repay it.

Next, let’s take a look at how the borrower or the borrower’s estate will finally pay off the loan.

The Payoff: Ensuring A Smooth Transition

A reverse mortgage must be repaid in full when the borrower sells the home or moves away for at least a year. As long as the borrower stays in place, the loan can be kept for life.

Pro tip: Read the contract carefully. There are stipulations a borrower must meet to keep the loan in place. For example, a homeowner who needs to stay, temporarily, in a healthcare setting should be mindful of the length of time away from home that the loan allows. Familiarity with any loan agreement’s language is important!  

After the borrower dies, a surviving spouse may continue to live in the house for life, too. While the survivor has to maintain the homeowner’s insurance, pay any HOA fees and property taxes, the loan due date will be suspended.

When the homeowners pass away, the estate must satisfy the outstanding balance. Any remaining value in the property can then be distributed to the beneficiaries of the estate. But the FHA’s reverse mortgage protects the heirs if the reverse mortgage debt exceeds the sale proceeds. The heirs never have to pay more than 95% of the property’s appraisal price, and the FHA covers further debt due to the lender.

Taking Out a Reverse Mortgage as Part of Overall Retirement Planning?

Many people have successfully done this. As long as interest rates stay relatively low, it can be a good decision. Because everyone has a unique set of circumstances, it’s important to speak with a lawyer with expertise in estate planning for personally tailored guidance.

It’s also important that your estate’s beneficiaries know what to expect. If the beneficiaries wish to hold onto your house, they will have six months to a year (depending if they request extensions) to satisfy the reverse mortgage debt — either by paying it outright, or getting a new mortgage. As the U.S. Consumer Financial Protection Bureau states:

With respect to a HECM [FHA reverse mortgage] loan, if the cause of default is death of the last borrower, any successors have up to six months from the date of death to sell or refinance the property and may pay off the loan for 95 percent of the appraised value.

Hiring a wills and estates attorney will help your loved ones navigate the system, thereby optimizing their financial position.

Supporting References

United States Internal Revenue Service: Frequently Asked Questions – For Senior Taxpayers.

Consumer Financial Protection Bureau (CFPB): Reverse Mortgage Servicing Examination Procedures (PDF).

Aly J. Yale for Money.com: Baby Boomers Are Uniquely Poised to Cash In Big on Their Homes (Aug. 27, 2021).  

Mortgage Professional America (MPA) via Key Media, Inc.: Reverse Mortgages – From Loan of Last Resort to Effective Retirement Planning Tool.

Deeds.com: Should You Get a Reverse Mortgage? Consider This (Dec. 1, 2019).

Photo credits: Gustavo Fring and Mikhail Nilov, via Pexels.