Retirement heralds a new chapter of our lives. People leave behind their daily grind and sit back, relax, and enjoy the spoils of their labor. According to a recent poll by Gallup, 80 percent of retirees in the US currently possess the finances to live comfortably. However, only 53 percent of the working population expect to share that sentiment when it comes to their time to leave gainful employment behind. Whether it is the economic downturn from the pandemic or career uncertainty in the age of decentralized finance, workers are reporting a much more pessimistic outlook than their predecessors.
In addition, most working Americans expect to retire at 64, while the actual mean retirement age is two years earlier, at 62. In a good scenario, this could be due to better monetary circumstances and therefore less need to work. Unfortunately, it is just as likely that early retirement could happen because of poor health or being made redundant. An additional year of employment brings substantial benefits to retirement finances including enhancing Social Security payments, accruing more savings, increasing compound interest, and shortening the years of dependency. With retirement closer than most have planned for, Americans could face a host of financial challenges in their senior years.
What is a Reverse Mortgage?
Retirement should be a time of enjoyment free from worry. Sadly, many older Americans are still struggling with their financial situation. For those whose monthly expenses depend predominantly on Social Security, it can be hard to cope with the pace of inflation and the rising costs of healthcare. Thankfully, many retirees have a fail-safe—their homes. For a large number of senior citizens, their only major asset is home equity. Reports have shown that baby boomers make up 33 percent of all homeowners in the US, with 41 percent owning their homes debt-free. Life looks sweet for retirees who have paid off their mortgages and receive a steady stream of income. For retirees who own their homes but require more ready money, reverse mortgages are a way to convert home equity into cash.
A reverse mortgage works just as it sounds—instead of a person paying installments to the bank for their house, the person receives payments from the bank that add up to the equity of their house. According to the National Reverse Mortgage Lenders Association, almost 42,000 homeowners aged 62 or older signed up for a reverse mortgage in 2020. Reverse mortgage payouts depend on the homeowner’s age, the value of the home, and the mortgage rates and associated fees. Payouts are relatively flexible, with recipients able to choose to receive a lump sum, a monthly income stream, or a line of credit. As with all lending agreements, there are, of course, some reverse mortgage risks. Nevertheless, the benefits are similarly significant.
For retirees who have had financial difficulties in the past, a low credit score can severely limit borrowing options. Reverse mortgages are concerned primarily with the home itself and thus negate the need to have a solid credit rating. Furthermore, reverse mortgages differ greatly from simply selling property in one very important way—seniors can continue to live in their homes after a reverse mortgage. A family home is a place filled with memories of a person’s life and most seniors would prefer to stay in a comfortable and familiar place during their retirement. Reverse mortgages also allow retirees to have flexible control of their money, with the ability to use disbursements to pay for utilities, food, medical expenses, travel, and even the education of their grandchildren.
Other Financing Options
For those who are unsure about committing to a reverse mortgage, other options can help turn home equity into spending money. The most straightforward, of course, is selling their home. An outright home sale typically results in a substantially larger sum of money than a reverse mortgage arrangement even after paying a capital gains tax and a commission to real estate agents. However, seniors would then have to deal with the stress and hassle of finding somewhere else to live. Some choices include downsizing to a smaller property, moving in with a relative, or transferring to a retirement facility.
Another alternative to reverse mortgages is for seniors to sell their homes to their financially successful children or relatives with the agreement that they are allowed to continue living there. If the buying party needs to generate income from the property, sale-leaseback agreements can be formed whereby the retiree pays a monthly rental fee for the home. This is a good way to keep wealth and assets within the family and ensure that heirs will end up owning their family home. But it is important to note that mixing finances with family could complicate relationships and lead to unwanted disputes.
With so many financing options available, it can be difficult for seniors to choose the best way to fund a comfortable retirement. By thoroughly examining their financial situation, personal needs, and lifestyle goals, retirees can decide how to best leverage their home equity and enjoy the fruits of their hard work.