If you are a senior with serious digs in places like California or the New York City area or other markets where many homeowners are house-rich and cash-poor, you might be able to secure these funds with only your home.
The market for jumbo mortgages is back, which means cash-strapped seniors with valuable real estate have an option for retirement funding, says Barron’s in the recent article “Reverse Mortgages Can Help House-Rich Seniors Free Up Cash for Retirement. Here’s How They Work.” A reverse mortgage, where owners tap the equity in their homes through mortgages that aren’t paid back until they leave the house, sell the property or pass, used to be considered a last resort. However, things have changed.
Financial experts began publishing research several years ago showing how the use of a reverse mortgage—strategically, not casually—could actually help retirement portfolios do better in times of down markets or as a way of delaying taking Social Security benefits.
Here’s the most simplified version: if the market is going up, use retirement accounts for income. If the market goes down, use the reverse mortgage.
After the research papers were published, it looked like reverse mortgages were going mainstream. However, in 2017, the federal government raised the initial mortgage-insurance premiums and lowered lending limits for federally insured reverse mortgages. The reverse mortgage sector took a dip.
Lenders have now begun rolling out proprietary jumbo loans that are not subject to these new federal regulations. They’re growing in popularity in areas where retirees have hefty amounts of home equity but are income short. For the most part, these jumbo reverse mortgages are now all about big sums of money. A new product is also starting to show up: jumbo mortgages that include a line of credit, in addition to a lump sum.
Some seniors are using the jumbo reverse mortgages to pay off conventional mortgages, or to raise funds for long-term care or living expenses. Boomers are more comfortable with holding debt than their parents. Other seniors are still better off using the federally insured reverse mortgage with a line of credit, to make their retirement funds last longer.
In the past, people waited until they were completely out of funds, before taking a reverse mortgage. The new strategy is taking a reverse mortgage early in retirement and using the money to protect retirement portfolios during market downturns. Even with the higher fees than traditional mortgages, this provides seniors with access to money immediately.
The cost of long-term care is expected to continue to drive the growing popularity of reverse mortgages. If the home is located in an area where it will continue to grow in value, that growth could offset the interest costs. If the market takes a tumble, the loan isn’t impacted.
Reference: Barron’s (December 16, 2019) “Reverse Mortgages Can Help House-Rich Seniors Free Up Cash for Retirement. Here’s How They Work”