Your House Can Pay You in Retirement

After years of making mortgage payments some retirees are nor getting payments back from their homes.  Reverse mortgages have been a possible part of retirement house-moneyplanning for many years.  They are a way for retirees to use equity in their home as a source of income payments.  The plans have often functioned in the form of an annuity with fixed monthly payments for the life of the reverse mortgage agreement or with a fixed sum payout at the closing.  Various options for the structure of reverse mortgages – some are discussed below.  There are some, however, for whom the reverse mortage option is simply not viable.  The reason for that has to do with the recent housing bubble and the ensuing collapse.

Some are Simply Not Eligible for Reverse Mortgages

For a reverse mortgage to be viable there must be substantial equity built up in a home. New retirees who used their house as a piggy bank by cashing out equity in the early 2000s may find that there is little equity remaining. The idea was that it would be okay to take some of the equity out of an appreciated property through an increased mortgage, a second mortgage or a HELOC (home equity line of credit). The idea was that the value of the house would continue to rise so taking some of the value out was okay.  Hadn’t the value of their house gone up by over 30% over the previous ten years?  Wouldn’t it be worth $420,000 in another ten years?

One problem with that: The prices of homes in many areas didn’t keep going up. On the average across the country home values have fallen more than 30% over the past five years.

So someone with a $300,000 home in 2006 with only $100,000 remaining on the their first mortgage, with 15 years left to pay, who took out a $100,000 second mortgage could have little or no equity remaining in their home.  For example, a 33% decline from $300,000 leaves $200,000 market value with something around $170,000 left to pay on the two mortgages. The $30,000 in this case is insuficient to make a reverse mortgage viable.  Had the cash-out financing not occurred the equity might have been around $120,000 and a reverse mortgage would have been a viable option.

For Some the Story is Even Worse

And this is not the worst story.  Just think of the homeowner who ended up with 80% (or 90%) of his home mortgaged in 2006.  That person is underwater in many housing markets and, not only cannot qualify for a reverse mortgage, is not able to refinance to current low interest rates because his mortgage balances are $210,000 (or $240,000) for a home with a market value of $200,000 and a loan value  between $160,000 and $190,000 (between 10% and 50% underwater).

The retirement dream for many for whom their home was their only large retirement nest egg (or for those who thought they could grow that nest egg through more leverage) has been changed into a long lasting nightmare.

What are the Reverse Mortgage Options?

For those that have made better financial decisions with their home mortgage there are many options available, such as:

  • Using a reverse mortgage for life-time or fixed term annuity income payments;
  • Using a reverse mortgage for a one-time payment need;
  • Using a reverse mortgage to purchase a lifetime annuity (not so desirable with current low interest levels);
  • Using a reverse mortgage like a home equity line of credit (drawing on and repaying as income or investments fluctuate; or
  • Using a reverse mortgage to buy a new home.

Details on the new reverse mortgage options are available in a news article at Global Economic Intersection.


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