The road to a comfortable retirement is paved with unexpected twists, turns and rocky terrain that can derail your journey. In the event retirees find themselves strapped for cash, there are several ways they can increase their spendable income using a reverse mortgage, says one personal finance columnist.
Reverse mortgages have often been touted as financial solutions for homeowners who are “house rich,” but “cash poor.” They can also be viable tools to help homeowners free-up funds
They can also be particularly helpful for homeowners looking to increase their monthly cash flow, while also freeing-up funds paid on housing related expenses.
“Our homes can be costly beasts,” writes finance columnist Scott Burns in a recent article published by the Houston Chronicle. “Even if there is no mortgage, there are bills to pay. The real estate tax, insurance, utility, repair and other bills remain.”
In the article, Burns provides several examples of how a reverse mortgage can increase the spendable income for a retired couple, aged 66 and who own their $300,000 home free of mortgage debt.
Burns also assumes this couple lives in a high-cost area, so the operating costs on their home are 4% of its value, or $12,000 per year. As medium-income workers, the couple’s combined benefits total $37,000 per year. After paying their shelter bills, they have $25,000 to live on.
“Can they do it? Sure,” Burns writes. “Millions of lower-income retirees get by on far less. Will they be comfortable? That’s doubtful.”
One way this couple could increase their spendable income would be by getting a reverse mortgage line of credit, or a guaranteed lifetime monthly payment.
Using an online reverse mortgage calculator, Burns finds that the couple, which he has dubbed “The Shortcashes,” would be eligible for a net credit line of $164,700, or a monthly payment for life of $938 per month, $$11,256 per year.
“So cash advances will cover the annual cost of shelter, and their spendable income increases from $25,000 to $36,256,” Burns writes. “That’s an increase of nearly 50 percent—all tax-free and without moving.”
The Shortcashes could also choose to move into a lower-cost area, particularly where the annual cost of operating a house is about 3% of market value.
“In that move they can buy a house for about $300,000 with a purchase-money reverse mortgage, putting down less than 50 percent,” Burns writes. “With the purchase-money reverse mortgage, they will have no mortgage payment and will be able to stay in the house until they die or are no longer capable of living there.”
The lower operating expenses of $9,000 will also be nice, he adds.
Read the Houston Chronicle column.
Written by Jason Oliva
