The Case Study below is an excellent example of the FHA Reverse Mortgage Program being used as valuable retirement planning tool.
Harold and Betty are clients that I have known for many years that have also grown to be good friends. I have helped them finance their homes and investment properties for many years.
Harold and Betty are 62 years old and thinking about retirement in a few years. They are very concerned they will not be able to retire in the lifestyle they are accustomed to. They spent much of their working life providing for their family, their 2 children’s education and generally making a good life for the four of them. Neither have a private pension and only have Social Security to look forward to as retirement income. Unfortunately they have not funded their own IRA or 401K to a level that is sufficient to allow them to live comfortably when they are eligible for full retirement benefits.
They pay $1827 per month on their $325,000 mortgage with 25 more years to go to pay it in full. Harold plans working another 5-8 years at most, but certainly not 25. Their home is valued at about $625,000. Although it seems as though they have $300,000 equity if they were to sell their home, the commissions and closing costs of selling and buying another home would reduce their net proceeds to approximately $250,000. So if they do not wish to have a mortgage payment, one choice is to sell their home and buy a $250,000 home. The problem is that none of the choices a $250,000 priced home provides are acceptable to them. Their friends, family and entire lives revolve around staying in their present home and real estate prices do not include good options for $250,000 homes in their area.
And, they cannot comfortably retire if they still have a mortgage payment.
Betty called me to see if a reverse mortgage could somehow help them face a better retirement in the future. She had seen the many TV commercials but did not know how it could possibly relate to their situation. We talked for a while, and set an appointment to meet in person to determine their options and see if they qualify under the new guidelines.
After our initial phone call I determined they could qualify for a an FHA Insured Reverse Mortgage. The new Reverse mortgage was able to pay off their present mortgage and stop the required monthly payments immediately. Harold was able increase his 401k retirement savings at work to the maximum $2,000 per month contribution since he no longer had to pay an $1827 mortgage payment.
According to their financial planner, over the next 8 years before retirement Harold and Betty will be able to save somewhere between $200,000 to $250,000 in their 401k retirement account instead of making payments to a mortgage. With this new plan in place, eight years from now when they retire, they will have an additional $250,000 in their retirement account as well as have the right to stay in their beloved home as long as they wish. Their only cash expenses of owning are exactly the same as if they owned the home free and clear. That is taxes, insurance and maintenance.
The Bottom Line
Harold and Betty are able to remain in their family home, without any new mortgage payment for as long as they live. If their home had already been paid for free and clear, there would be many other alternatives that could supplement their income. These include a lifetime tax free monthly income or an open line of credit. Either with no monthly payment required. Each borrower’s qualification and potential loan amount is based on his or her age, income and financial capacity. The numbers illustrated above are not the same for each scenario and cannot be relied upon in your own situation.
The FHA Reverse Mortgage is a valuable tool in planning for retirement. It should be carefully considered as a viable option to supplement retirement income or preserve access to the equity in a retiree’s home.