Fighting inflation with reverse mortgages. What retirees need to know

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Many older Americans worry that they will outlive their savings, a fear that has been exacerbated by the recent spike in inflation that is eating away at the eggs of retirees.

The consumer price index in April increased by 0.8% compared to March and by 4.2% compared to the previous year. biggest jump since September 2008

As retirees weigh their options to maintain purchasing power, financial experts say adding reverse mortgages to pension plan can offer inflation protection.

“More and more people are looking at this strategically,” said Don Graves, president of the Housing Welfare Institute and author of Housing Welfare: A Guide to Reverse Mortgages.

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While the Americans record amounts of equityDuring the pandemic, it was not easy to access it.

Several large banks stopped offering lines of credit for home equity amid economic uncertainty. As a result, some cash-strapped seniors turned to cancellation of mortgagesespecially during stock market downturns.

But reverse mortgages can also be a proactive strategy, said Wade Pfau, professor of retirement income at the American College of Financial Services.

How a reverse mortgage works

A reverse mortgage – also known as a Home Equity Conversion Mortgage or HECM – offers seniors 62 and older the opportunity to borrow money from home equity.

These fixed or variable rate loans are for older Americans who plan to stay in their single family home.

The variable rate option offers a line of credit with no obligation to withdraw money, and the unused balance can build up over time. (The fixed rate version does not offer the same benefit, making it less useful in fighting inflation.)

The old adage was to wait until you run out of money and then apply for a reverse mortgage. Now this is completely different from how it is used.

Don Graves

President of the Institute for Housing Welfare

Typically, older retirees can borrow a larger amount of capital.

For example, at an expected rate of 3%, a 62-year-old homeowner could borrow about 52% of the value of his home. According to Pfau, this percentage rises to 61% at the age of 75.

Currently variable rates can range from 2.5% to 4%, he said, depending on short-term variable interest rates, often tied to Treasury bonds.

With regard to the line of credit, heirs can repay the loan upon the death of the borrower, allowing them to keep or sell the property.

Reverse mortgages to protect against inflation

Typically, retirees spend their investment portfolios while maintaining equity capital.

But studies suggest Pfau said there could be unexpected benefits to include a reverse mortgage in a retirement plan.

“The more significant effect is that you reduce the pressure on the portfolio after retirement,” he said.

Research shows that reverse mortgages can offer some retirees more money to spend while giving their portfolio a better chance of growing.

The advantage of opening a reverse mortgage line of credit early, especially when interest rates are low, is that the retiree can borrow more now. This move can give more time for the unused balance to grow.

In addition, he said, higher inflation will accelerate the growth of the credit line.

“For anyone thinking of a reverse mortgage, opening it up before interest rates rise can be very beneficial if you’re in a home you think you’ll stay in,” he added.

Cons of a reverse mortgage

One of the biggest disadvantages of a reverse mortgage can be: price

Retirees pay 2% of the home’s appraised value for mortgage insurance premiums, plus 0.5% of the outstanding balance each year over the life of the loan.

The initiation fee is 2% of the first $ 200,000 and 1% of the amount exceeding this amount up to $ 6,000.

Third party fees such as appraisal, name lookup, inspection, and other fees are usually 1% of the value of the home.

For example, suppose a retiree has a $ 400,000 home. They’ll pay $ 8,000 for mortgage insurance premiums, $ 6,000 for registration fees, and about $ 3,000 for third-party fees, Graves said.

In addition to cost, Pfau said, retirees will need a well-thought-out spending strategy.

Some may be tempted to blow up newly raised capital, which could have devastating consequences for their retirement plan, he said.

However, reverse mortgages may be worth the attention of retirees worried about their purchasing power.

“The old adage was to wait until you run out of money and then apply for a reverse mortgage,” Graves said. “This is not the way it is used now.”

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