Why retirement planning and real estate need to be looked at together.

The homeowner is retired.

The house is completely paid off.

There is substantial equity in the property.

But based on the current spending and retirement income, the available cash could be gone in approximately nine months.

The homeowner does not want to sell the house.

They also don’t want to take out a traditional mortgage and add another monthly payment.

So the question becomes:

What happens in month 10?

Being House-Rich and Cash-Poor

This is something that can happen in retirement.

You may own a $500,000, $700,000 or even $1 million home free and clear but still struggle with monthly cash flow.

The house has value, but that value isn’t paying the groceries, insurance, utilities, travel, healthcare and everyday expenses.

Selling the home is one option.

A traditional mortgage or HELOC may be another.

But for an older homeowner who wants to stay in the property, a reverse mortgage may also be worth understanding before there is a financial emergency.

What Is a Reverse Mortgage?

The most common reverse mortgage is an FHA-insured Home Equity Conversion Mortgage, or HECM.

It is generally available to homeowners age 62 or older who meet the program requirements.

You are borrowing against the equity in your home, but unlike a traditional mortgage, there is generally no required monthly mortgage payment.

You still own the home.

Instead of the loan balance getting smaller every month, the balance generally grows as you receive money and interest and fees are added.

That distinction is important.

A reverse mortgage is still a mortgage.

But it works very differently from the traditional mortgage most homeowners are familiar with.

The Money Doesn’t Have to Come All at Once

Depending on the program, reverse mortgage proceeds may be structured several ways:

• A line of credit
• Monthly payments
• A lump sum
• Certain combinations of monthly payments and a credit line

The amount available depends on factors including the homeowner’s age, interest rates and the home’s value.

For someone worried about retirement income, this opens up an important conversation.

Instead of selling a paid-off home simply because cash is running low, could some of the home’s equity be used to create additional monthly cash flow?

That is worth analyzing.

But a Reverse Mortgage Doesn’t Fix an Expensive Lifestyle

This is probably the most important part of the conversation.

If someone is projected to run out of money in nine months, simply giving them access to more money doesn’t solve the underlying problem.

We still need to understand:

How much is coming in each month?

How much is going out?

How large is the monthly shortage?

How many years could the available home equity reasonably support that shortage?

The CFPB specifically warns homeowners to consider how quickly they use reverse-mortgage proceeds because borrowing more means more interest and fees accumulating over time.

The goal shouldn’t be to turn the house into another checking account.

The goal is to create a retirement strategy.

Why I Would Rather Have This Conversation Early

Waiting until the bank account reaches zero creates pressure.

So can waiting until there is a health problem, a family emergency or another major expense.

When there is still cash available and the homeowner is able to calmly review the options, there may be more choices.

That could include:

• Reducing monthly expenses
• Using a reverse mortgage
• Using another home-equity product
• Downsizing
• Selling and buying something less expensive
• Using a combination of strategies

A reverse mortgage is not automatically the answer.

But ignoring several hundred thousand dollars of home equity while retirement savings are disappearing doesn’t make sense either.

There Are Still Responsibilities

A reverse mortgage does not eliminate the normal costs of owning a home.

The homeowner must continue to meet requirements such as paying property taxes and homeowners insurance, maintaining the property and using the home as the principal residence.

HECM borrowers are also required to complete counseling with a HUD-approved reverse mortgage counselor before obtaining the loan.

The loan generally becomes due when the borrower sells the property, dies or no longer uses the home as a principal residence, subject to rules concerning co-borrowers and certain eligible non-borrowing spouses.

That is why the homeowner and family should understand the entire strategy before moving forward.

The Bigger Question

When someone tells me:

“I don’t want to sell my house and I don’t want another mortgage payment.”

I understand that.

But if their retirement money could be gone within nine months, we also have to ask:

What is the plan after the money is gone?

Sometimes the best time to evaluate your home equity isn’t after you run out of money.

It’s before you need it.

Your home may be more than the place you live.

For many retirees, it is one of the largest financial assets they own.

Understanding how that equity fits into the retirement plan is part of the money side of real estate.