Reverse Mortgages and Retirement Planning

Logically, it might seem that using a reverse mortgage is metaphorically “driving backwards”, right? Well, that depends. It used to be that we saw them as a powerful tool for those who knew how to use them. Now, to some, they are counter-intuitive. But what if you’re sitting on record amounts of equity that you never planned for and want to maximize your retirement? We can help men 50 and over cut through the clutter with our blog: Reverse Mortgages and Retirement Planning.

You’ve probably seen the infomercials with their celebrity endorsements promoting the program as a “lifeline” to cash-strapped seniors. But are reverse mortgages a savvy approach to building retirement income? Here’s a quick intro to how a reverse mortgage works, the pros and cons of using them for retirement, and how to determine whether using a reverse mortgage for your retirement plan is for you.

What Is A Reverse Mortgage & How Does It Work?

A reverse mortgage is a loan that allows homeowners at least age 62 to access the equity in their house. It’s a secured loan with your home equity as collateral. Another way to look at it is to view it as literally a “reverse mortgage.”

Rather than requesting a home loan and paying the bank with regular monthly mortgage payments, a reverse mortgage lets you receive payments (either via lump sum or monthly payments) from the bank with your home equity as collateral. Technically, the lender is buying back your home from you.

The amount you can access depends on your life expectancy. The older you are, the more money you can access from your equity. The younger you are, the less you can pull out. In short, it makes the payments to you spread out across the expected remaining years to live.

As with any loan, there are interest rates built in. (The mortgage company expects to get paid somehow.) They add the interest rate to the balance of your reverse mortgage as each payment is made to you.

There are two types of reverse mortgages available. You can choose between a fixed rate and adjustable rate. Fixed rate reverse mortgages allow you receive a one-time lump sum payment, whereas an adjustable rate reverse mortgage gives you multiple options to receive regular payments at an adjustable interest rate.

The benefits of requesting a reverse mortgage are having access to extra money when needed, zero taxes on the proceeds and you don’t have to make monthly mortgage payments after requesting money.

Reverse Mortgages and Retirement Planning

Seniors over age 62 who may need extra money to plan for their retirement often look to a reverse mortgage to use the equity in their home as extra retirement income.  Some plan on using a reverse mortgage strategically as part of their retirement plan, others turn to a reverse mortgage because of an emergency or economic downturn that resulted in a major loss to retirement savings.

Pros of Using A Reverse Mortgage for Retirement Planning

If your house is worth $400,000, you’ve paid it off but you’re short on retirement money, wouldn’t it be nice to access that $400,000 to help sustain your retirement income? Consider the following pros of using a reverse mortgage for your retirement income: [1]

• Access to potentially a lot of home equity. Otherwise, your equity would sit there in your home with no use.
• Access to tax free money.
• No monthly mortgage payments.
• Helps compensate your retirement income to live a more comfortable lifestyle.
• Used as needed in the event of an emergency.
• Can be used to consolidate debt, home improvements, help children with college, or even buying another home.
• Many fees associated with a reverse mortgage can be built into the loan itself, so you don’t pay anything out of pocket up front.
• Your spouse may continue living in the home after you’ve passed away, even if the reverse mortgage is in your name.
• It’s a “non-recourse” loan which means any amounts paid to you over your home equity value will not be a liability to you or your estate.[2]

Cons of Using A Reverse Mortgage for Retirement Planning

The benefits of using a reversed mortgage for your retirement plan are many, but you must also consider the downsides associated with a reverse mortgage to make a wise decision.[3]

• The insurance, property taxes and home maintenance are all still required (although you can pay it with proceeds from the reverse mortgage if you wish). Otherwise, you may be required to pay back the loan if not kept up with payments and maintenance.
• An accelerated increasing loan balance due to the interest charged to the balance of the loan.[4]
• Using your home equity means fewer valuable assets to leave behind to your family or estate.
• Getting a reverse mortgage may alter your eligibility for other potential government programs/assistance.
• Reverse mortgages charge higher fees than regular mortgages do.

Should You Use A Reverse Mortgage in Your Retirement Plan?

Obviously, you need money to sustain a comfortable life in retirement. If you’re short, consider your options to adjust your needed income in retirement, then decide if a reverse mortgage is still a good supplemental tool to compliment your retirement income.

If you’ve planned for retirement but there is a major unexpected economic downturn, you may consider a reverse mortgage. Following the same strategy as above by adjusting your living costs first, then deciding whether a mortgage is a good option is a wise approach. A reverse mortgage could help supplement your income while you await your retirement portfolio to bounce back from a rebounding market.

Otherwise, consider the fact that mathematically, you are lowering your net worth at an accelerated pace by taking on additional debt with steep prices. It’s not uncommon for an individual in retirement to request a reverse mortgage and end up having to sell their home because they could not meet the requirements and steep fees of owning a reverse mortgage.

Final Thoughts

A reverse mortgage is a home loan that allows you to access the equity in your house and turn it into cash. You can use this cash to help supplement your retirement income, unexpected emergencies or even to purchase an additional home. Reverse mortgages are only available for those over the age of 62.

Benefits of reverse mortgages are additional retirement income, tax free money, no monthly mortgage payments and even money for home upgrades. Downsides of using a reverse mortgage are the potentially high fees, a fast-growing loan balance, and potentially harm your eligibility for other government assistance programs.

Before seeking to get a reverse mortgage, consider your current retirement lifestyle and see where you can lower your living expenses. Then, decide if you can afford the potential risks associated with using a reverse mortgage, and if the benefits outweigh the potential downturns.

We hope that you’ve found some useful information in our piece: Reverse Mortgages and Retirement Planning. As always, if you don’t see something here you want us to cover, feel free to reach out to us directly through our Contact page or leave a comment below. Happy retirement planning! ~ Glen.

References

[1] https://www.reversefunding.com/pros-cons

[2] https://www.nerdwallet.com/blog/mortgages/reverse-mortgage/

[3] https://www.reversefunding.com/pros-cons

[4] https://www.debt.org/real-estate/mortgages/reverse/