How to Use a Reverse Mortgage to Enjoy Retirement

It’s official, reverse mortgages are no longer a last resort when it comes to retirement planning.  Instead, it has become an acceptable retirement planning tool, one which an increasing number of seniors are turning to.  With that in mind, here are some ways you can use a reverse mortgage to enjoy retirement.

An Introduction

For those who don’t know, a reverse mortgage is a way to take advantage of your equity without needing to make regular payments.  This differs from a home equity loan or a second mortgage as both require the borrower to make monthly payments.

However, reverse mortgages are not for everyone.  To qualify you must be at least 62 years old.  In addition, you will need to have a certain level of equity built up in your home.  If not, then you might not have enough equity available to justify the cost of the loan.

While some observers are skeptical about reverse mortgages (and this is a good thing) many retirement planners are starting to see them as a valuable tool, one which will reduce the burden of worrying about having enough money for retirement.

Coordinate Spending

Managing withdrawals can be challenging for many retirees.  If their accounts are focus on stock, then the challenge becomes maximizing returns while minimizing capital gains.  In addition, unexpected expenses can force retirees to make withdrawals at the most inopportune times.

Having a reverse mortgage which is set up as a standby letter of credit can help retirees to better manage these issues.   However, the size of the letter of credit depends on several factors.  This includes how much your home is worth, how much you currently owe, and how much you need.

Taken together this will give you an idea of the funds available to you and then you can sit with your financial advisor to figure out the best plan to manage these funds.  This sort of review will also help you to map out contingencies, such as what will you do if your portfolio drops by 5% or 10% or more.

A couple of the plusses to using the line of credit feature of a reverse mortgage is that it is revolving – this means you can continually access the funds if you pay down the balance – and the available line will grow as the value of your home appreciates.   As you can see this function is a great way to coordinate spending to make you can make the most of your retirement.

Put Off Social Security

Ok, it might sound odd to say putting off Social Security is a way to enjoy your retirement.  But did you know that delaying payments until can increase your benefit by more than 30%?

While this sounds great, the challenge for most retirees is that they lack the resources to delay Social Security payments.  This is where a reverse mortgage can come in by providing the extra capital needed to delay receiving benefits until the age of 70 or later.

In fact, this bridge is become more popular as it also increases survivor benefits as well.  The best way to use this option if you plan to sell your home shortly after you begin collecting Social Security payments.  This way you minimize the accrued interest due.

IRA Conversion Time

One of the most dreaded parts of retirement is the IRA conversion.  If you are like most people, then you will need to pay taxes on any disbursements from your IRA account before the age of 70 ½.

This can be quite painful as the taxman will be looking to take a large chunk of your money, as such a reverse mortgage can be a way to cover the fees.  However, you will want to discuss this with your financial advisor as this approach might not work for everyone.

Rainy Day Fund

We are living longer, more active lives.  As such, it is become harder to ensure you will have enough money to live into your 80’s.  Getting a reverse mortgage can give you access to the additional capital you need to fund a long retirement.  In fact, these funds can be used to purchase additional life insurance as well as long-term care insurance.

There you have it, these are just some of the ways a reverse mortgage can help you enjoy retirement. As your situation might be slightly different than some of the scenarios outlined above you want to make sure you talk to your financial advisor to review this options base on where your retirement plan is today and where you need it to be tomorrow.

3 thoughts on “How to Use a Reverse Mortgage to Enjoy Retirement”

  1. I find the whole idea of a reverse mortgage really interesting. Personally, I think they can make a lot of sense. For so many people their home is their largest asset, but it doesn’t really do them much good unless they want to sell it and move. By using a reverse mortgage, you can make your home work for you while still living there. It makes sense to me.

  2. I will say right off the bat that it has been over 10 years, but I used to work at a mortgage company that did reverse mortgages. Perhaps things have changed a lot since then. I don’t know. What I can say about them back then is that they were not that great. Closing costs were very expensive, you did not get the full appraised value of your home, plus all liens and taxes had to be paid up with the proceeds from the loan. A lot of people were very disappointed with the actual amount of money they ended up receiving. BE VERY CAREFUL. Make sure you fully understand what you are getting into if you decide to apply for a reverse mortgage.

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