What is Your Retirement Financial Back-Up Plan?

Most Americans have contingency plans in case something goes wrong: a flashlight in the glove box in case of an auto emergency, or a generator in the garage should the power go out for an extended period of time. If you are like most people, you probably have a spare tire in your car in the event of a flat. And the list goes on.

You’re not expecting that you’ll need these items, but they are there in the off chance you do need them and they provide some peace of mind in the meantime—just in case.

But do you have a backup plan for your investments? You probably have health insurance, but what if your spouse needs long-term care earlier than expected? Or what if your home needs a major repair that you have not planned for and your insurance doesn’t cover? Some people have savings in a slush fund to cover these emergencies.  But many of us do not. There’s one financial contingency plan many Americans are utilizing to give them peace of mind around these types of unforseen events: a reverse mortgage. And recent changes to reverse mortgages under the federal government’s Home Equity Conversion Mortgage Program have made reverse mortgages even safer than ever before. The reverse mortgage as a back-up plan Many people understand reverse mortgage basics, such as the premise that a reverse mortgage allows borrowers to receive money from their home equity in the form of a loan that does not have to be repaid until they pass away or move from the home. But less understood are the different types of payment plans and how a reverse mortgage can serve as a backup in the event of an unforseen expense. Borrowers have the option to receive their loan proceeds as a lump sum, on a term or tenure payment plan (such as montly payments predetermined by your lender) or as a line of credit. The line of credit is where the backup plan comes in. This line of credit does not have to be used; it can simply remain available should you need it, in case of an unforseen expense. Reverse mortgage line of credit costs In order to get a reverse mortgage, borrowers face some costs and fees. An origination fee will be paid to the mortgage loan officer based on an upfront fee and the home’s value. An upfront mortgage insurance premium must be paid to the Federal Housing Administration under the loan terms. This MIP provides protections such as the guarantee that the borrower will never have to repay more than the home is worth. (An ongoing MIP also applies, but does not not have to be paid until the loan comes due.) An appraisal fee will be charged, as it is with any “forward” mortgage, for an appraiser to determine the value of the borrower’s home. Closing costs also apply, as they would with any home loan. These include items like:

• Credit report fee
• Settlement fees
• Document prep fee
• Title insurance
• Pest Inspection
• and others.

Like all loans, a reverse mortgage also accrues interest. However, that interest does not have to be paid until the loan comes due (rather than monthly or annually as is common in other loans). And the interest only accrues based on the amount of money that is actually withdrawn. Reverse mortgage line of credit benefits For a reverse mortgage line of credit, the borrower only pays interest on the funds that are withdrawn. This makes it an excellent way to provide financial backup in the event of an emergency while keeping costs low. An additional benefit: the line of credit growth feature. For any period of time when a borrower’s reverse mortgage credit line is not used, the available line of credit actually grows. Many financial planners today are recommending the reverse mortgage line of credit option to borrowers who qualify based on their age and home equity, as a “standby” strategy for meeting unforseen retirement costs. The longer the line of credit goes unused, the greater the line of credit accessible becomes. Learn more about the reverse mortgage credit line option and how it can be your retirement financial backup plan. Or, use a Retirement Calculator for a full look at your retirement finances.  Input your information, get a full analysis of where you stand right now, then use “Your Plan” to imagine different scenarios.  You can even model getting a reverse mortgage to see how it impacts your finances — including your cash flow and net worth.