|
Although many people spend decades planning for retirement, the topic often causes anxiety. In fact, a study by the National Institute on Retirement Security found that 56% of Americans are concerned about achieving a financially secure retirement.
The good news is that many retirees have an asset they may not realize could supplement their retirement income or provide needed liquidity: their home. However, a reverse mortgage isn’t the right solution for everyone. Whether this tool makes sense depends on a range of individual circumstances and needs. Read on to find out when a reverse mortgage might be a good idea.
Who is eligible for a reverse mortgage?
Before asking if a reverse mortgage is right for you, it’s important to determine if it’s an option. To be eligible, you must own your home and have substantial equity in it. You must also meet the minimum age requirement for the loan. For a Home Equity Conversion Mortgage (HECM), the minimum age is 62. For proprietary reverse mortgages, the minimum age can vary depending on the specific loan terms. Other reverse mortgage eligibility requirements include:
- Living in the home as a primary residence.
- Attending a counseling session with a HUD-approved third-party counselor.
- Maintaining the home and paying home-related expenses such as property taxes, insurance, and HOA dues, and meeting the other terms of the loan.
When might a reverse mortgage make sense?
A reverse mortgage offers eligible homeowners several advantages that can help address gaps in their retirement planning. For instance, retirees facing monthly cash shortages may find that eliminating their mortgage payment gives their budget the breathing room they need. Although borrowers don’t make monthly loan payments, they still have financial obligations related to homeownership. These include maintaining the home and continuing to pay property taxes, insurance, and any necessary HOA dues. While the removal of a mortgage payment can offer relief, homeowners who struggle to meet these obligations may not be good candidates for a reverse mortgage.
Below are several ways that eligible homeowners have used reverse mortgages to strengthen their financial position. Please note that this is not financial or tax advice. Before making any major financial decision, it’s always wise to consult an independent financial advisor.
- A cash reserve to hedge against uncertainty
A reverse mortgage line of credit can serve as a reserve fund for emergencies or big-ticket expenses outside of a regular budget. Since a reverse mortgage is a loan, any proceeds a borrower takes will not be subject to income tax. However, other taxes, including property taxes, still apply. Because borrowers are not obligated to use their line of credit, many whose current finances are stable find peace of mind in knowing they have a reserve should they need it in the future.
Some people take pleasure in seeing their children and grandchildren benefit from their hard work during their lifetime, which can be a reason to take out a reverse mortgage. This choice is only suitable for those with secure financial plans who will not need their home equity in the future.
Converting a traditional IRA into a Roth IRA is attractive because it can reduce future income tax liability. However, making the conversion requires a substantial payment to the IRS to cover the taxes deferred when contributing to the fund. Using funds from a reverse mortgage to make this payment allows retirees to benefit from lower future income taxes without needing to cash out investments or retirement savings.
When is a reverse mortgage not a good idea?
While a reverse mortgage can provide a financial cushion, it isn’t the right fit for everyone. Even though it allows access to an often-untapped asset, it should be used as part of a comprehensive retirement plan that includes other assets, safeguards, and long-term projections.
A reverse mortgage may also not make sense for those who don’t plan to stay in their home long-term. Since moving from the property automatically ends the loan, homeowners who move must repay the loan balance. For those considering downsizing, a reverse mortgage for purchase might be a better option.
Deciding whether a reverse mortgage is a good idea involves examining your finances and values from all angles. A qualified financial planner can help you assess whether a reverse mortgage fits your situation and future plans.
Find out how to use your home equity to live your best life.
| 
