Accessing your home’s equity to supplement a retirement plan is an option that many baby boomers are choosing. Many retirees are finding that the bulk of their wealth is tied up in their homes and not in their retirement accounts, leaving many to seek alternative solutions like reverse mortgages.
Reverse mortgages allow borrowers in retirement (of a certain age) to take a loan against the valuation of their home without having to worry about repayment unless they want to sell. The responsibility of repayment falls to the estate of the individual in which case the home reverts to bank ownership. These mortgages are like their name in reverse, as the loan gets larger over time. The value of the loan will never equal more than the value of the home so borrowers can feel safe that they will not be evicted from their homes.
As an assurance to retired borrowers, these loans are heavily regulated and according to Bob Budreika, a reverse mortgage specialist, “lenders are very conservative on the amount they will allow people to borrow because they run the risk, not the borrower.” Additionally, regulations stipulate that to get 15% of the value of your home you must be 65. The scale slides and an 85-year old borrower could qualify for as much as 45% of their home’s value. The number of reverse mortgages was on the rise over the past decade, and the market had grown to $3.6 billion before it slowed in the wake of the economic crisis. Products such as these would not have been as popular a generation ago, as the previous generation was very concerned with leaving assets to their children, according to Budreika. “The baby boomers coming through and some already retiring, have got a very different attitude to their parents’ generation who were frugal and wanted to leave as much as they could to their children. “The baby boomers are saying ‘stuff the kids, I’m going to spend their inheritance.’
Retirees should begin by doing initial calculations to determine how much of their equity they need to withdraw using this method, and never borrow more than is need. Start with $300-$500 a month instead of the entire lot.