The New Reverse Mortgage: This is Not a Loan of Last Resort

Reverse mortgages have been commonly viewed as a last resort that should be avoided like the plague. This false “loan of last resort” reputation reduces reverse mortgage use among many retirees who stand to benefit from tapping into their home equity. However, several recent developments have transformed these products into viable financial planning tools. New underwriting standards, more consumer protections, and a slew of financial planning research over the past few years have evolved the reverse mortgage into a valuable retirement income planning resource. Reverse mortgages have many practical uses in retirement planning, but they are often most effective when taken earlier in retirement rather than as a last resort option — and for several reasons.

1. Flexibility to Do What You Want to Do

Some people get a reverse mortgage because they are out of options and they need a way to continue living, which is an okay thing to do. However, most people get a reverse mortgage to give themselves more flexibility to do what they want with their golden years. Whether you want to travel, remodel the kitchen, buy a boat, or you simply want to stay in your home; you can do whatever you want with the financial benefits of a reverse mortgage.

2. Reverse Mortgage Can Be Better Than Your Actual Last Resort

If you want or need more money, a reverse mortgage may be a better option than going into credit card debt, asking family for help, or selling your home. A reverse mortgage is a viable option for people who want to use the money that they have accumulated in their home. Our generation is the first to be retiring without widespread access to pensions, and many of us have not saved enough to make up for that lost income. However, we did work hard to buy a home.  The money we paid into our mortgages is a great source of wealth that we have every right to use.  

3. Options for Making the Most of Your Money

Taking advantage of a reverse mortgage as early as possible during retirement greatly increases the chances of not outliving your money. Obtaining a reverse mortgage line of credit (an amount of credit extended to the borrower) early in retirement allows it grow in value if untapped. If left alone long enough, funds in this credit line can potentially exceed your home’s value. How may the above be true? A reverse mortgage can provide you with funds that eventually exceed your home equity because of two reasons. One factor is related to the growth feature in the line of credit disbursement option. The other is the result of certain provisions built-into reverse mortgages. The majority of reverse mortgages found on the market today are known as Home Equity Conversion Mortgages (HECMs). These reverse mortgages are insured by the Federal Housing Administration and have what is called a “non-recourse” feature, which protects borrowers from owing more than their home is actually worth. The amount borrowed and accrued interest must be repaid once the homeowner moves from the house for an extended period of time or no longer lives in the property as a principal residence. However, since it is a non-resource loan, the amount owed will never exceed 95% of the appraised value of the home.

4. Not a Last Resort — Reverse Mortgages Can Be a Back Up Plan

You may not need or want extra money now, but when an unexpected financial crisis hits, accessing your home equity last minute with a reverse mortgage is not easily done — this type of loan can take upwards of 45-90 days to fund. Having a reverse mortgage line of credit available may be a good idea for several reasons:

1. It’s there if you need it, and the bank cannot pull the line of credit if your finances change.
2. It grows over time (if untouched), so the amount of equity you can access becomes larger year after year.
3. When the market isn’t performing, you can draw from your equity instead of liquidating investments.  When the market is doing well, pay your line of credit back if you want to keep the balance low.

Is a Reverse Mortgage Right For You?

Taking a reverse mortgage earlier in retirement — as opposed to waiting until it’s the last resort — has the potential to greatly benefit retirees who tap into their home’s value with a line of credit. Reverse mortgages do not provide a one-size-fits-all solution, and depending on your financial situation, these products might not fit your retirement needs at all. If you are considering a reverse mortgage line of credit, and would like to know more about how this financial tool can fit into your planning goals, feel free to contact us for more information.