Imagine waking up in retirement to find you no longer have a mortgage and there’s $50,000, $100,000, or $250,000 more in your bank account than you expected.
This scenario isn’t just a castle in the sky. In fact, it plays out every day. The way it happens is with a reverse mortgage, and more than one million seniors have used one to retire better.
Before getting into how you can make a Home Equity Conversion Mortgage (HECM) reverse mortgage part of your better retirement, let’s share some ways people are putting these loans to work.
Benefits of a Reverse Mortgage
Reverse Mortgage Benefit #1: Pay off and manage debt
It’s hard to think about enjoying retirement if your very retirement is under siege from big bills and expenses, including higher-interest credit card debt.
If more money is going out each month than coming in, and you’ve done all you can to trim spending, then a reverse mortgage loan could provide you with exactly the supplement to your income you need to plug those troublesome financial leaks endangering your retirement.
The first thing a reverse mortgage loan does is pay off your mortgage as a requirement of the loan, if you still have one. That alone should increase your monthly cash flow. After paying off your existing mortgage, you can receive the remainder of your loan proceeds in a payment plan of your choice to strengthen other areas of your retirement.
Reverse Mortgage Benefit #2: Build your rainy-day fund
It may not be raining today or next week, but regardless of where you live (with the exception of the Atacama Desert in Chile, where rain has never been recorded), you can expect at least a little rain to fall at some point in your retirement.
A reverse mortgage can help you build that rainy-day fund — and then some. With a reverse mortgage line of credit, you can keep it in reserve for when you really need it, such as covering unforeseen medical bills or in-home care needs, as long you continue to meet your ongoing property tax, homeowners insurance, and home maintenance obligations and continue to occupy the home as your primary residence and otherwise comply with all loan terms.
But here’s the exciting part: if you leave your reverse mortgage line of credit untouched, say, for 10 or 15 years, you could easily find a much larger line of credit awaiting you, and that’s because a reverse mortgage offers a powerful growth feature.
This potential for increased credit capacity is indeed defense for a rainy day.
Reverse Mortgage Benefit #3: Protect your other retirement investments
If you went through the housing crash in 2007-2008 and the economic roller-coaster ride of 2020, it means you know how those kinds of cataclysmic events can easily derail even the best-intentioned retirement plan. It’s not fun watching your retirement savings lose a third or even half their value at lightning speed, then hoping but not knowing if it’ll bounce back.
Had you retired at the start of one of those epic economic upheavals and begun withdrawing from your retirement accounts, your savings would have run off faster than if these same financial catastrophes had occurred later in your retirement. This unfortunate timing of retiring right when the market is retreating is a very real and potentially devastating phenomenon known as “sequence of returns risk.”
One way to avoid or at least dampen its corrosive impact on your retirement savings is to rely on a reverse mortgage or alternative source of cash until the market rebounds. Before invoking any strategy to preserve your investments, consult your financial advisor.
Reverse Mortgage Benefit #4: Avoid paying capital gains on selling your home
Let’s say you’ve exhausted your savings and retirement accounts, making you think you have no alternative but to sell your home to get the cash you need to meet your everyday living expenses. The trouble is, when you and your spouse purchased your home, it was worth $50,000 and now it might be worth at least $1 million. If you sell it, you’re going to take a big capital gains hit, even if you can exempt part of your profits, depending on federal and state tax laws.
A workaround would be to take out a reverse mortgage. In many U.S. states, when one spouse dies, the surviving spouse’s potential profit or capital gain is no longer based on the initial price paid for the house, but its current value. So, even if you paid $50,000 for the home and it’s worth $1 million today, in those states, when the spouse dies, for tax purposes it’s as if you paid $1 million. If the surviving spouse chooses to sell at that time, they wouldn’t have any capital gains exposure. Upon the sale, you would then pay off the loan, a reverse mortgage requirement.
Before implementing any tax strategy, check with your accountant first.
Reverse Mortgage Benefit #5: Delay taking Social Security
As of June 2023, if you stuck your money in an FDIC-insured, high-yielding savings account, you’d be lucky to get around 4.50%. But every year that you can delay taking Social Security, your patience and discipline will be rewarded by growth of about 8%. Once you reach 70, you can still delay taking Social Security, but this growth principle no longer applies.
In an example posted by Fidelity, by waiting until age 70 to take your Social Security benefits instead of starting them at age 62 — the earliest age benefits can begin (with a few exceptions) — you would receive a monthly payment that was 76% larger.
Reverse Mortgage Benefit #6: Fix up your home the way you want
Your home is your castle, but maybe it’s showing a little wear and tear. By fixing it up the way you like, inside and out, you can return to being the lord or lady of the manor, hosting more family events and special occasions — maybe you’re envisioning a grand new patio, deck, and outdoor kitchen.
While you’re making your home more attractive and saleable, you can also make it safer by perhaps widening a door or hallway or installing flooring that doesn’t send you skating across it like an ice rink. A reverse mortgage could truly help you finance a age-in-place home improvement plan.
Reverse Mortgage Benefit #7: Buy a home that better fits your retirement lifestyle
Problem: Everyone you care about has moved away. Solution: Move to them.
That’s right, you can use a reverse mortgage to help you fix up and enjoy your current home, or you can use one just as easily to purchase a new home more suited to your retirement lifestyle.
By financing the purchase of a new home with a reverse mortgage, you won’t have any monthly mortgage payments. You are still obligated, however, to keep up your home, pay property taxes and homeowners insurance, continue to occupy the home as your primary residence, and otherwise comply with all loan terms.
Reverse Mortgage Benefit #8: Help your children and grandchildren
Your children may be looking to purchase their first home, where they can start building equity, just the way you did when you bought your first place. Or if they don’t need financial help, perhaps you can start building a strong financial foundation for their children — your grandchildren.
By seeding educational accounts early, these accounts will have years to leverage the wonders of compounding interest.
You could also foot the bill for a big family vacation that you’ve been talking about for years, an idea that never quite got off the ground because money was a little too tight. Well, now you can with a reverse mortgage.
Reverse Mortgage Benefit #9: Take your passion to that next level
Maybe you love photography and feel you could really elevate the quality of your work with an investment in a new lens or computer program that you haven’t pulled the trigger on because of the expense. Perhaps you’re a woodworker who could produce twice the number of gifts for your family and friends in half the time, if only you could buy that new lathe you’ve had your eyes on. Maybe you can finally spring for that plein air painting or interior design class that’s always been at the top of your list.
A reverse mortgage could give you the financial freedom to explore and expand your passions.
Reverse Mortgage Benefit #10: Help others
A reverse mortgage could also allow you to do more for others. It can free you to do more volunteer work or financially support an organization that has always owned your heart, like your local animal rescue shelter. It can allow you to plant the seeds to create the legacy by which you want to be identified and remembered.
How a Reverse Mortgage Works
There are many ways you could put a reverse mortgage to work to help you retire better. So how does a reverse mortgage work?
A reverse mortgage is a financial tool that allows you to convert some of the built-up equity in your home into cash. Unlike a traditional home equity loan or line of credit that you begin repaying soon after your loan closes, a reverse mortgage loan doesn’t have to be repaid until you leave your home. However, you must continue to maintain your property, pay property taxes and homeowners insurance, and continue to occupy the home as your primary residence and otherwise comply with all loan terms. In addition to having no monthly mortgage payments (a reverse mortgage pays off your existing mortgage, if you still have one, as a requirement of the loan), you get to designate how you want to receive your loan proceeds.
Reverse Mortgage Requirements
To be eligible for a reverse mortgage, you must:
- Be 62 years or older (a non-borrowing spouse may be under age 62)
- Own and live in your home as your primary residence
- Undergo a financial assessment to ensure a reverse mortgage can serve you as a sustainable, long-term retirement solution
- Receive reverse mortgage counseling by an independent, HUD-approved third-party to confirm you understand your obligations and responsibilities with a reverse mortgage
- Maintain the property and continue paying property taxes, homeowners insurance, homeowner association, any other applicable fees, and continue to occupy the home as your primary residence and otherwise comply with all loan terms.
So, how much money could you receive from a reverse mortgage? Many factors are involved in calculating your payout, but the three biggest are your age, your equity (home’s appraised value minus any liens), and the prevailing interest rate.
The older you are, the more loan proceeds you’re likely to receive.
Your home value:
A higher-value home versus a lower-value home should result in more loan proceeds.
Prevailing interest rate:
A lower interest rate is likely to result in a greater payout.
Again, there are other factors, but these are the biggest.
Reverse Mortgage Safeguards and Protections
To start, HECM reverse mortgages are insured by the Federal Housing Administration (FHA), an agency within the U.S. Department of Housing and Urban Development (HUD) that is regulated. HUD has also established a cap on the amount of money you can access your first year to help you better balance your short- and longer-term financial needs.
Should you opt for a tenure plan (one reverse mortgage payment option that allows you to receive payments for life, as long as you continue to comply with your loan terms), and you exceed your life expectancy, the FHA’s insurance covers the difference so you can continue to be paid. Insurance covers you if your lender goes out of business. Furthermore, if you were to die, leaving a loan balance larger than the value of your home, the FHA’s insurance fund covers the difference.
Receiving funds from a reverse mortgage also will not affect your Social Security or Medicare. A reverse mortgage, however, could impact Medicaid or Supplemental Security Income (SSI), so please speak with your accountant, tax advisor, or appropriate benefits agency for more information.
With a reverse mortgage on your team, having more money and greater cash flow for your retirement doesn’t have to be a fantasy or false hope. One can help you put together both a solid defense and offense to help you win the retirement game.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.