SWR and Reverse Mortgages

[TromboneAl]

Nice forum you have here.

My question: When doing your SWR calculation, should you factor in the equity in your home?

My feeling is that since my wife and I feel no need to leave anything to our heirs, and that we could get a reverse mortgage at some point if necessary, that the home equity should be factored in.

I know nothing about reverse mortgages -- perhaps there are some disadvantages that I don't know about.

What are your thoughts?

BTW -- what does "FIRE" stand for (I hope this won't offend anyone, but all I could come up with is: "F*** it, retire early!")?

Thanks!

 

[Martha]

BTW -- what does "FIRE" stand for (I hope this won't offend anyone, but all I could come up with is: "F*** it, retire early!")?

Thanks!

LOL! "Financially Independent, Retire Early" I prefer your's.

 

[arrete]

but all I could come up with is: "F*** it, retire early!")?

Hee! Financially Independent/Retired Early

When doing your SWR calculation, should you factor in the equity in your home? ... we could get a reverse mortgage at some point if necessary, that the home equity should be factored in.

The value of your residence is usually not factored into the SWR calculation. However, you raise an interesting point. I suppose it could be done. I have heard that reverse mortages aren't always as advantageous as you might think, but I haven't looked into it.

I have a similar situation where the house I live in is across 2 lots. Real estate is really booming around here, so if I had to, I could sell the house (which would be torn down and 2 monsters put in it's place) and be able to buy a nice small place with cash to spare. It's an interesting problem, because you have to consider that you have to live somewhere.

arrete

 

[cute fuzzy bunny]

Sell the house and rent an equivalent. Maybe sell your house to someone and rent it back? CD ladder the proceeds, in many markets the interest thrown off pays most of the rent. No maintenance costs. Pretty good deal if you can live with renting.

Otherwise you run the risk of running out the reverse mortgage, still being alive, and probably being well past your ability to return to work...

By the way, I think everyone should breathe a sigh of relief that I didnt throw out my first half dozen suggestions for what 'fire' stands for...but all six started out pretty much the same way

 

[Nords]

Re:  Gotta be at least 62.

We're presuming that your home will be worth more later, that it will appreciate faster than inflation, and that no one discovers a toxic waste dump in your back yard. These scary things are not common but they have happened to people in your position.

If you're planning on selling the home someday, then you should count the home equity. If you think that you're riding the razor's edge on portfolio survivability, then take out the home equity and see if your retirement portfolio is adequately capitalized without it. That way the home gives you an equity cushion.

Reverse mortgages are only available to those 62 & older and they're not that common so their origination fees tend to be higher than other financing options (like a HELOC). Here's a Dollar Stretcher article on the subject from Sep 2002. The article has HUD links for more research; HUD regulates these mortgages quite tightly to avoid fraud on the elderly.

The payout is based on the mortgager's actuarial estimate of your life expectancy. If you live longer then you "win", but once you die your heirs will either have to sign the home over to the mortgager or pay off the balance. That decision may be up to the mortgager but I'm not sure who has first claim to the equity. It probably depends on the wording of the contract.

It's not uncommon for private European investors to pay annuities to elderly homeowners in the hope that the homeowner dies before the annuity is wiped out. One of the world's oldest women died in France at, IIRC, the age of 122. The investor that sold her annuity paid it for thirty years before he died (and she outlived him for another decade).

Your best bet may be a HELOC or selling the home and moving to a cheaper place.

 

[Mr._johngalt]

The biggest advantage (to me) of a reverse mortgage
is that you don't have to pay the money back (as long as you stay in the house). I looked into this recently
(don't recall the fees involved), but they told me I could borrow up to 45% of value ( after I turn 62 of course). I told them I might borrow in advance of 62 and then pay that debt off in a lump sum at closing. They said no problem.
Wells Fargo does a lot of these. It's a fallback option for us, assuming we keep this house which looks more and more likely.

BTW, re. "Should you count your home equity?"
(when planning and figuring SWR) I throw in
everything but the dryer sheets

JG

 

[Cut-Throat]

I don't count my home equity at all for my SWR.

But if the U.S. hits extremly low real rates of return over the next 25 years, I may use the reverse mortgage as another 'ace in the hole'