Traditional Use of a Reverse Mortgage Converting Housing Wealth into
Monthly Checks and Liquid Cash
If you find yourself barely making it through the month. If you are living from Social Security check to Social Security check. If you have runout of retirement savings, are getting ready to runout of retirement savings or just never had savings to begin with. Or if you just want more income, this is how you can convert home equity into monthly reverse mortgage payments to you.
According to research completed in 2020 by SimplyWise.com, the average cost of living during retirement is $51,624. This varies from state to state, for example in Oregon it’s $68,712, in California it’s $86,171, in Washington it’s $56,890, in Arizona it’s $52,140 and in Idaho it’s $58,108.
What’s scary is the 2022 U.S. Census Bureau data shows that the average retirement income for retirees 65 to 69 is $57,640. For those 70 to 74 $50,231. For those 75+ it is only $36,925. In other words, over half of retirees don’t earn enough income to cover the average cost of retirement.
For most homeowners 62 or older, their home is their largest asset. If you are “house rich and cash poor” the reverse mortgage could be the answer you are looking for.
Let’s look at converting home equity into monthly reverse mortgage payments and the benefits it can provide to a homeowner.
Scenario – Converting Home Equity into
Monthly Reverse Mortgage Payments
Greg and Carolyn are both 70 years old and they own a home in Oregon worth $550,000 free and clear. They were both self employed most of their lives and took full advantage of the tax codes. By doing this, they did not have much in the way of Social Security income. In fact, combined, they had a total income of $1900 a month.
They were fairly frugal, but they both wanted to have the security of extra money each month. With extra cash they could still take out the RV to visit grandkids, dine out more often, have more fun and remove that weight off their shoulders.
They had well over $100,000 sitting in the bank and other investments. But they did not want to touch these retirement savings to increase their income.
They decided they wanted to get a reverse mortgage to increase the amount of spendable cash they had every month.
Here are the numbers on their new monthly adjustable rate reverse mortgage:
Principal Limit: $238,150 (most they can borrow)
Initial Interest Rate: 5.995%
Growth Rate: 6.495% (Interest rate plus mortgage insurance)
Fees: Origination: $6,000
3rd Party Fees: $4,938
Initial Mortgage Insurance: $11,000
Total Fees: $21,938.20
Net: $216,212 (initial funds available to receive checks)
Monthly Check: $1315.35 (tenure option)
Rates as of 9/12/2022. The initial APR is 5.995%. The loan has a variable rate, which can change each month. The rate is tied to the 1 year CMT plus a margin of 2.375%. There is a 5% lifetime interest cap over the initial interest rate. This means that the maximum APR that could be imposed is 10.995%. Rates and funds available may change daily without notice. Closing costs vary by property state. Please call or visit online for further details.
In this example Greg and Carolyn chose to go with the Tenure option which means they will receive monthly reverse mortgage payments for as long as one of them is living in the home as their primary residence and they are following all other terms of the loan.
Even better is the fact that these reverse mortgage payments continue regardless of what is happening with the home value of their home or the loan balance. The home value going down has no impact on the payments. Even if the loan balance were to exceed the home’s value, the payments would continue.
They were able to increase their income by $1315 a month and $15,784 a year. This is the equivalent of getting a 69% raise in their Social Security income.
The life expectancy of this couple is 15 years according to the government. During that time, they would receive $236,763 in payments. This is more than the initial funds netted from the loan which was $216,212. If they lived until they were 90, they would net $315,684 in payments. This is almost $100,000 more than the initial funds netted.
Here is what their loan looks like over time, assuming interest rates never change and a home appreciation rate of 4%.
Based on this projection, in 15 years they would have received $1315 a month for a total of $236,763. They are also forecasted to still have $365,068 of equity in their home. Even if interest rates changed for Greg and Carolyn, up or down, they would still receive the same reverse mortgage payment every month. The only thing that would change would be the loan balance.
What if Greg and Carolyn did not need the full $1315 reverse mortgage payment to feel financially comfortable?
In that case they could go with a Modified Tenure. This means they would set up monthly payments and a line of credit.
For example, using the previous numbers for Greg and Carolyn, they decided they only needed an extra $750 a month. In that case, they would also be able to set up a line of credit in the amount of $92,929.
Here is what their numbers look like. Assuming no changes to interest rates, a 4% appreciation rate, and no draws.
The light grey represents the home value, the dark grey represents the loan balance, and the black represents the line of credit.
The dark grey bar shows the loan balance is increasing over time as Greg and Carolyn receive their $750 reverse mortgage payments every month, plus the accruing interest and mortgage insurance.
The black bar shows the growth of their line of credit over time assuming they take no draws. The funds in the line of credit are growing at 6.495%.
In this example, getting $750 a month from the reverse mortgage is the equivalent of getting a 39% raise in their Social Security income.
On top of that they have a source of liquid cash they can draw from to pay for large expenses, vacation or whatever they want to do with that money.
If in 10 years if they wanted to convert some or all of the money in the line of credit into additional monthly income, they could do so.
Structuring the loan this way gives peace of mind knowing that not only will you be receiving a check for as long as you live in your home. But that you also have another source of back up cash in case you need it.
If you are interested in seeing what is possible with a reverse mortgage and you situation and you would like to see how much you could get with monthly reverse mortgage payments, give me a call and let’s schedule a time to meet.
