A reverse mortgage could be your best option

Happy old couple

Retried people are homeowners. Of those with more than one hundred thousands dollars in savings, about 90% own a home. Among those with less savings, a still-substantial majority own their homes.

Retired tire sign

The ability to access home equity can save a retiree from running short on cash or being forced to sell stocks, bonds and other investments when the market for these instruments is lousy. “That is really going to improve a retiree’s cash flow, especially for people relying on withdrawals from their savings because they don’t have a pension,” an expert in the field says.

If you don’t need that big family home anymore, retirement is a good time to put the old house up for sale and replace it with one that’s more affordable. Making the right move means you could cut the utility, tax, insurance and maintenance bills.

The cash you clear on the deal likely will escape income tax. The state lets single homeowners to exclude the first $250,000 of profit from capital gain taxes ($500,000 for a married couple filing jointly). That’s a big benefit of homeownership.

We suggest you consider taking at least part of the windfall and buying an immediate annuity to guarantee yourself income you can’t outlive.

Citing US Census data, it is estimated that there are about 34 million spare bedrooms in the United States. At $100 a week in rent, cheap in many parts of the country, an entrepreneurial retiree with unused space could gross over $5,000 in annual additional income.

With rents so high for regular apartments and even studios, co-living arrangements are becoming quite common. Be sure to do your homework before welcoming a boarder into your home. A traditional home equity line of credit, or HELOC, can pay for remodeling or cover other home-improvement expenses in preparation for stopping work and selling the home, or staying put.

“Tapping this kind of credit a year or two before you retire can be a good plan as long as you can pay it back before it becomes burdensome,” an expert says. “But if you have to spread the payments out over 15 or 20 years, then you are better off looking at a different financing plan that doesn’t include a risk that you’ll be strapped for a long time.”

In this cozy arrangement, parents sell property to an adult child or to a specially designed trust for the long-term benefit of the younger generation and then lease the property back.

These loans go by different names in different states and municipalities, but they are all similar. They provide some form of government-subsidized loan to older homeowners who need money for home repairs or for remodeling so they can stay in their homes safely and comfortably as they get older.

Reverse mortgage lines of credit are available to borrowers 62 and older who have equity in their homes. They can draw on the equity when they need it, and no payback is demanded until they die or move away. For these reasons, the home can be a great resource when retirement savings runs low.

“The line of credit grows over time. It doesn’t have any required monthly principal and interest payments, and it doesn’t have a predefined maturity date,” says a strategic business development leader at a national reverse mortgage lender.

Far more people qualify for a reverse mortgage than for a loan to purchase a home, he points out, because borrowers don’t have to be able to afford principal and interest payments. “We only underwrite for taxes and insurance.”

Reverse mortgages used to have a bad reputation, but the government has shut lenders’ ability to sell reverse mortgages to people who can’t afford them. Used strategically, it can be a very good tool.

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