The reverse mortgage has carried a stigma with it from the Financial Crisis in 2008, but through the evolution of the product along with newer Federal Housing Authority (FHA) guidelines, the reverse mortgage can be a valuable tool for homeowners over the age of 62. In this article, we will be discussing how these loans can be used as a financial resource during retirement.
Many homeowners are entering into retirement with high amounts of home equity, but this asset usually does not get pulled into the picture when it comes to calculating retirement income. There are a few ways your home equity can be utilized when planning for retirement. Here are a few examples:
Using a reverse mortgage to supplement retirement income
Many retirees work hard for years but may have started saving for retirement later in life. Because of the delayed savings, retirees may not have enough investment assets to cover future living expenses. A reverse mortgage could be used to supplement the cost of living for the remainder of their lives. There are two avenues borrowers can pursue; A fixed-rate loan allows the borrower to access equity as a lump-sum and an adjustable rate loan can be utilized as a line of credit or to establish monthly payments.
Using a reverse mortgage to pay off current mortgage
Many workers plan to pay off their mortgage before walking away from the workforce. Not having a mortgage can help lower monthly spending in retirement or even reduce withdrawals from retirement accounts to pay for living expenses. We all know life doesn’t always go as planned and you may need to carry a mortgage into retirement. Homeowners with outstanding mortgages can use a reverse mortgage to pay off their remaining loan to improve cash flow throughout retirement.
Using a reverse mortgage as a “long-term care insurance policy”
Long-term care has a reputation for being expensive, so much so that many retirees cannot afford long-term care coverage. Because of this, the equity in your home could be reserved to cover medical care costs that may arise in the future. A reverse mortgage would allow a homeowner to tap into their home equity without having to put it on the market, which is especially important if a spouse continues to live in the home.
Those are just a few examples of how a reverse mortgage can be used during retirement. It should be noted that a reverse mortgage is indeed a loan. You or the heirs of your estate are responsible for paying back what you borrowed either when the house is sold or when you pass away. Reverse mortgages can also be expensive. Interest rates are typically higher than traditional mortgage rates. Along with accruing interest, there are origination fees, FHA mortgage insurance premiums, and servicing fees that all add up.
All in all, reverse mortgages can be a great resource for retirees, but don’t fit in to every financial picture. Our team at Sharkey, Howes & Javer is here to help you explore all your options, from reverse mortgages and beyond. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™.
