In a perfect world, ideally it is to not have debt of any kind including no mortgages, having a huge retirement portfolio to cover one’s lifestyle and long-term care costs.
However, in the real world, many who have thought they have saved for retirement find that when “life happens” they use those funds quickly. The reverse mortgage is a tool for planning for retirement and long-term care costs as well as more immediate needs. This way they have a plan and funds for when “life happens.”
Financial advisors, planners, insurance agents, wealth managers, estate planners, tax advisors and other financial professionals are realizing the value of using one’s home equity, especially the HECM reverse mortgage, to be part of one’s plan. There is even some discussion on the importance discussing the reverse mortgage as an option for one’s retirement plan by professors of finance at various universities.
Here are some ways a reverse mortgage could be utilized as part of one’s retirement plan.
Protect other investments/Hedge against longevity risk – With the reverse mortgage in place and having cash available, borrowers’ can protect their other investments and retirement portfolios to hedge against longevity risk if those decrease or not have to draw on those, especially in a down market. They can still have cash flow yet save the investments for future use or use those funds for an inheritance.
Eliminate current mortgage payment – By using the reverse mortgage to pay off the current mortgage it allows one to improve their cash flow and have more flexibility for their retirement planning. (Borrowers are still responsible for paying property taxes and hazard insurance.)
Payment flexibility – Payments on the reverse mortgage are not required. However borrowers can choose to make payments in an amount they choose and when they choose. If they use the reverse mortgage to pay off their current mortgage and then continue making payments, the payment will reduce the loan balance and be applied to their line of credit. The funds in the line of credit will grow, meaning they will have funds in the future to re-borrow without refinancing and having to pay closing costs again.
Another big plus with the payment flexibility is if one can’t make a payment because they are no longer working or have a medical expense, they will have better cash flow management.
Funds for emergencies and/or long-term care – The HECM Adjustable Rate has a line of credit option with a growth rate. Taking out the reverse mortgage at an earlier age and leaving the line of credit to grow will provide more funds for emergencies and/or later when it’s likely they will need long-term care.
Purchase a new home – Rather than using cash, other retirement funds or a conventional mortgage, the HECM reverse mortgage for purchase (H4P) offers a stronger strategy. See page 19 for more details.
Proceeds are not taxable income – Because it is a loan, the reverse mortgage proceeds are not considered income and therefore not taxable. Therefore one can draw from the line of credit and not have the tax liability unlike some other retirement investments may have.
Continue working but have funds when not able to – Doing the reverse mortgage with a line of credit now could mean more funds available in the future. Borrowers can choose to continue working but when they can’t work anymore, or choose not to, they could have funds to replace their income.
While working they could choose to make payments on their reverse mortgage but then stop making payments when no longer working and take monthly draws or draws as needed to replace their work income.
Social Security claims – With the reverse mortgage in place the proceeds could replace the Social Security income when one spouse passes and they lost the 2nd Social Security income. They could set up receiving monthly payments so their cash flow continues allowing them to maintain their lifestyle.
One could use reverse mortgage proceeds to delay taking Social Security as part of their plan meaning they would increase their monthly Social Security benefits. The CFPB has cautioned about this strategy. Borrowers should consult with their financial advisors to determine if this would be a strategy for them and what is best for their situation.
Available funds even with lower home value – Because the funds are guaranteed to be available based on the home value at the time of closing (FHA insurance benefit), if home values decline (remember 2008?), the reverse mortgage borrower could still have access to more funds than the value of the home and the line of credit will continue to grow even if the home value declines.
Not depend on children – If one needs addition funds for maintaining lifestyle, medical expenses, long-term care, etc, the reverse mortgage could provide funds so they don’t have to rely on their children.
If children want to tap their financial portfolio to help care for their parents, a reverse mortgage on the parents home may be a better plan; providing funds for the parents needs and preserving the child’s portfolio for their own future.
Long-term Care Insurance – One may not qualify for long-term care insurance or afford the premiums so the reverse mortgage line of credit could act as an “insurance” to cover the long-care needs.
If one does qualify for long-term care insurance, the reverse mortgage line of credit could provide funds allowing a higher long-term care insurance deductible and a longer waiting period before drawing from the long-term care insurance.
Payoff spouse in a divorce – The reverse mortgage can be used to pay off a spouse going through a divorce, allowing one spouse to remain in the home.
Use in probate – In the case of the death of a parent, the reverse mortgage could be used to pay off a sibling or siblings so one can remain in the home or purchase the family home. This is beneficial when one child has been living in the home and taking care of the parent(s), and wants to remain in the home.
I am not a financial planner/advisor, accounting advisor/CPA or an attorney. This information is provided as ideas to use for one’s plan. One should consult with their financial, accounting and/or legal advisor on what works for their situation.
If you’d like to improve your retirement cash flow now or for the future, contact us if you are in Minnesota. As your local broker, we work with several lenders and provide free information and facts with no obligation, meeting in person whenever possible.
For other states, contact your local reverse mortgage specialist who is a broker, one who works with several lenders, has their Broker License/NMLS and preferably holds the Certified Reverse Mortgage Professional (CRMP) designation.
© 2018 Beth Paterson, CRMP, Beth’s Reverse Mortgage Blog, 651-762-9648
This material may be re-posted provided it is re-posted in its entirety and without modifications and includes the contact information, copyright information and the following link: https://wp.me/p4EUZQ-1DT
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Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.
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