Fresh Ideas for Retiring Rich
These seven bold strategies can help you supercharge your savings and realize your dreams.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, October 2005
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Retire on the house
6. John and Marie Evans of St. Louis promised one another that they would live out their retirement years in the house that they bought in 1950. "We made a pact that we would never separate," says John, 80, a retired photographer. But after Marie, 79, suffered a stroke two years ago and required a walker and a wheelchair, "we needed money to make the bathroom big enough to get her in and out." Struggling on a fixed income, the couple solved their cash problem by taking a reverse mortgage, which let them borrow against their home equity and forgo repayment as long as they stay in the house.
Once relatively rare, the number of such backward-looking loans has increased fivefold since 2001, according to the National Reverse Mortgage Lenders Association. "The confluence of historically high home values and historically low interest rates means that people are able to take more equity out of their homes," says Peter Bell, president of the group. And rather than resisting the idea, "boomers are helping their parents get the loans," says Bronwyn Belling, of AARP. (You can download "Home Made Money," a guide to reverse mortgages.)
To qualify for a reverse mortgage, you must be at least 62 and live in the house as your principal residence. The loan, including interest, comes due only when you die or move from your home, at which point the proceeds from the sale can be used to pay off the balance. You or your heirs get to keep whatever equity has built up since you took out the mortgage. If the value of the house falls below the loan amount, the lender absorbs the difference.
Among the several reverse-mortgage programs, the most popular is the Home Equity Conversion Mortgage, backed by the Federal Housing Administration (search "reverse mortgages" at www.hud.gov). You'll generally be offered four payout choices: a lump sum, an interest-earning credit line, monthly advances paid out over a set period or smaller monthly advances that last as long as you live in your house. You may combine a credit line with an advance or choose some other combination. Most borrowers roll the cost of financing, which can hit five figures, into the loan.
No matter what the program, don't expect to pull every last coin out of the equity treasure chest. The amount you get depends on your age, local housing costs, interest rates -- which adjust monthly or yearly -- and the type of payout you choose. (For estimates of what you can expect, go to www.reversemortgage.org). Figure on getting no more than about 40% to 60% of the equity in your house. "Banks are really conservative about how much they'll allow," says Rick Van Benschoten, of Lenox Advisors, a financial-services firm. "If the house plummets in price, they're left holding the bag."
Even a relatively small windfall can pay for a new roof -- or, in the case of the Evanses, a bigger bathroom. "Nobody lies in bed at night thinking, I should get a reverse mortgage tomorrow," says Bell. "But they do lie in bed thinking, What am I going to do if these expenses come up?" In addition to remodeling the bathroom, John paid Marie's hospital bill, replaced the furnace and retired a credit-card bill that had crept dangerously high. "Last year, I was unable to maintain everything," he says. "This put me where I could function."
-- Jane Bennett Clark
