When is the best time to get a reverse mortgage loan? If you are at least 62 (the minimum age for applying), the best time might be now.
That’s because, included in a reverse mortgage’s many payout options is the reverse mortgage line of credit. By taking out the line of credit as close to the time you first become eligible for a reverse mortgage loan, and then simply don’t touch it until you really need it — treating it like an emergency or rainy-day fund — you can maximize the size of your line.
Of course, if you need cash now, your line of credit is built for that, too. You can tap a portion of your line to meet your current cash needs while the unused portion continues to grow. This use-it-whenever-you-need-it feature of a reverse mortgage line of credit gives you great flexibility and control over your retirement.
Now, let’s take a closer look at five strategic ways you might put a reverse mortgage line of credit to work for your retirement needs:
Meet Immediate Cash Needs
Nearly 70% of Americans had less than $1,000 stashed away, according to GOBankingRates’ 2019 savings survey.1 The reasons many Americans have had difficulty saving for retirement are easy to find — lack of pensions, underfunded 401(k)s and IRAs, or lingering effects from the 2008 Great Recession, to name a few.
And now in the throes of the coronavirus pandemic, more than 30 million people have filed for unemployment since March2. In the past, if you had home equity built up, one of your options might have been to open a home equity line of credit (HELOC) to help you bridge your financial gap, but in April, JPMorgan Chase and Wells Fargo, two of the nation’s largest banks, announced they had stopped accepting all HELOC applications due to the coronavirus shock.3
On a more positive note, older Americans started 2020 with a record $7.2 trillion4 in home equity wealth. That’s money many of them may be able to tap to help them ride out the current economic conditions. By using a reverse mortgage line of credit, they could create more cash flow, cover everyday expenses and pay off medical bills or high-interest credit card debt.
Fill the Financial Gap Created by Anemic Savings Rates
It used to be that you could put your money in a savings institution and watch it double in a reasonable number of years. It was called the Rule of 72 (divide 72 by your savings rate of return). For example, if you put $1,000 in the bank at 8%, your savings would roughly double to $2,000 in nine years (72 / 8 = 9 years). Today, the average savings rate is well under 1%. You do the math to see how long it would take for your $1,000 to double. With such anemic savings rates, older Americans will have to look elsewhere to get the income they need to sustain their retirements, which includes considering a reverse mortgage loan. Its most flexible option? The reverse mortgage line of credit.
Delay Taking Social Security
If you claim Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits. For every year you delay past your FRA up to age 70, you get about an 8% increase in your benefit.5 Considering what savings rates are now, 8% annual growth seems like the better option. To deploy this “delay-for-greater-pay strategy,” you could tap a reverse mortgage line of credit in the interim.
In search of higher returns, investors have been rewarded by putting money in the stock market, which enjoyed an 11-year bull run before collapsing in March.6 With the crash, retirement portfolios were down sharply by double-digit percentages. And if retirees were selling investments in order to continue funding their retirements, their portfolios took an even larger hit.
If these same investors had secured a reverse mortgage line of credit or another dependable source of cash, not levered to the markets, they could use these funds to help preserve their portfolio and pay for their retirement needs until the markets had stabilized.
Fund Long-Term Care
You may be healthy now, but you want the security of knowing you will have money set aside in the event you need it for medical care down the line. Some money for your long-term care could come from Medicare, Medicaid, traditional health insurance, long-term care insurance, life insurance and other plans, but they are likely to vary in the degree of coverage they provide because of exacting qualifying standards.
If you open a reverse mortgage line of credit early, say, in your mid-60s and don’t touch it until your mid-80s, your credit line could easily double during that time as the value of your home increases. That’s a feeling of security.
Given the far-reaching devastation caused by Covid-19, nearly everyone is wondering when things will return to normal or, maybe more realistically, what the new normal will look like. Answers have been hard to come by, with some suggesting that we are still in the early innings of the crisis, with others speculating that we’re closer to the seventh-inning stretch.
With so much uncertainty hanging over the economy — with many companies even suspending earnings guidance7 until the economy yields more clarity — millions of Americans are seeking ways to strengthen their financial safety nets.
One response, while home values remain relatively high and interest rates are low, has been an increased interest in reverse mortgage loans and its most flexible option, the reverse mortgage line of credit. Put some of it to work now to create more cash flow or don’t touch it and watch it continue to grow.
By putting a reverse mortgage line of credit in place now, you’ll have the added peace of mind that you’re prepared to meet a variety of cash needs, no matter when they arise.
We hope this article has given you some 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. Please consult your financial advisor.