First let me say that I am not a fan of debt, especially in retirement. However, in certain circumstances it can be appropriate. What I find is that often people’s largest asset is their home. However, it typically does not help them much if they are not willing to sell the assets to access the equity. One way to use your home equity is with a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage.
A reverse mortgage enables those over the age of 62 access to their home equity for income without having to make monthly mortgage payments. To qualify, you must live in the home, continue to pay your insurance and property taxes, and continue to properly maintain the home. The loan typically becomes due when you move out or pass away. At that time, you or your heirs can choose to repay the reverse mortgage loan and keep the home, or sell the home to repay the loan.
There are many misconceptions regarding reverse mortgages. In the past, they were very expensive. Now, in my opinion, the cost is reasonable and it is a good time to lock in a historically low interest rate. It is wise to shop around as the costs will vary depending on the type of loan you choose, how much money you take out upfront, and the lender that you choose. Many retired homeowners are now taking advantage of these programs, the most popular of which is backed by the United States Department of Housing and Urban Development (HUD).
So what are some uses of a reverse mortgage that may make sense? Many use the funds to consolidate debt, pay for medical expenses, or pay off an existing conventional mortgage, thus freeing up cash. It can also allow for remodeling or repairs, increasing the value for when it comes time to sell. One use of the reverse mortgage could be to fund the tax liability on converting part of your retirement accounts to a Roth. Converting to a Roth lets you pay the tax liability today in return for tax-free income during your and your heir’s lifetime. Having a tax-free pot of money to go to in retirement can also help you keep your income taxes down. Another use is as a line of credit that can be used to fund living expenses when the stock market is down. This can buy you time to let the market recover versus forcing a sale at an inopportune time. This strategy could help your money last several more years into retirement.
Just like anything in life, reverse mortgages are not for everyone. They are best suited for retired homeowners that prefer to remain in their home and that need or would prefer more cash to enjoy their retirement.
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