Using a Reverse Mortgage for Retirement Planning

Are you comfortable with your investment strategies? Are you prepared to live on a budget? Have you saved enough? If not, it may be worth looking into a reverse mortgage.

Reverse mortgage retirement strategies and benefits

Many retirees are finding they can take advantage of a reverse mortgage as a financial planning tool. They choose a reverse mortgage to:

• Delay Social Security
  This is a great way to extend retirement funds. Mathematically waiting until your full retirement age (66 for many of us, 67 if you were born in 1960 or later) to take your Social Security benefits results in a benefit amount that is about 30% higher than if you start taking benefits at age 62. Waiting until age 70 results in a benefit that is about another 32% higher. Is delaying access to that money as easy as it sounds? It can be if you take advantage of a reverse mortgage, which can provide you with monthly income. This way your immediate need for access to cash is taken care of and your Social Security benefits can continue growing.
• Grow a line of credit
  The line of credit option allows you to draw on your loan (subject to limits). Interest is only charged on the amount of money you take out. It's not charged on your remaining credit line, which you can take out at a later date. Should you choose to let it grow, you can access more money (compared to what's available now). Learn more about this in the research section below.
• Be mortgage-free
  Whether it's something you achieve over time or something you take care of before leaving the workforce, eliminating mortgage payments can provide a supplement to your monthly income that really makes a difference. Keep in mind, you will have to continue paying property taxes and homeowner's insurance. If you expect to carry a mortgage into retirement, but prefer an option to pay it off faster, you'll want to consider a reverse mortgage. You can use your equity to make your mortgage payments or to receive a lump sum that will pay off your mortgage balance.
• Pay off high-interest debt
  Credit card interest rates are in the upper teens. In fact, as of October 2017, they're around 16.15%. Carrying a credit card balance is an extreme disadvantage that can slowly deplete your savings. An easy way to take care of it is through a cash-out refinance, or by considering the ability to access tax-free cash through a reverse mortgage loan.
• Purchase a smaller home
  Many baby boomers sell their homes to move into condos or retirement communities. Although tough to consider, downsizing is an effective way to add money to your savings while also eliminating the stressors of stairs (should mobility issues surface), high mortgage payments, and ongoing home maintenance. But how does a reverse mortgage come into the conversation? Well, through a reverse mortgage purchase loan, you can combine proceeds from the previous residence sale with reverse mortgage funds, all within a single transaction.
• Pay for in-home care
  According to Tom McInerney, President and CEO of Genworth Financial, "…at least 70 percent of Americans over age 65 will need some form of long term care services and support during their lives." Costs of care will vary, depending on whether you need assistance with daily living (ADL's) or instrumental activities of daily living (IADL's). Expect to pay $15-$25 per hour for in home care and know that Medicare does not help with any of those costs.

As you can see, a reverse mortgage does not have to be a last resort option. It's in your best interest to see if a reverse mortgage makes sense for your retirement goals.

Benefits of a reverse mortgage line of credit

As mentioned earlier, one of the key benefits of a reverse mortgage is the ability to open a line of credit.

Professor Wade Pfau published a study in the Journal of Financial Planning about opening a reverse mortgage line of credit early in retirement. He suggested the homeowner delay using it until after the investment portfolio is depleted. This strategy allows the credit line to grow over a longer period of time before it is ultimately used, which provides for more income.

In another study (Journal of Financial Planning), researchers Barry H. Sacks, J.D., Ph.D., and Stephen R. Sacks, Ph.D., found that coordinating a line of credit with spending down liquid assets was an alternative to taking out the reverse mortgage. They found that accessing the line of credit in years when the market has a negative return is a better option than selling assets during a market decline to meet living expenses.

Taking these research findings into consideration, you'll see there are many ways to use a reverse mortgage to make retirement savings last longer.

Stronger reverse mortgage regulations

According to HUD Secretary Ben Carson, changes were needed to put the HECM (reverse mortgage) program on a more sustainable footing so that it can remain a resource for senior borrowers. Not long after that statement was released (October 2017), upfront HECM mortgage insurance premiums were increased for certain borrowers, putting rates more in line with the rates of traditional mortgages. Principal limit factors were also changed, impacting the amount of home equity available for homeowners to tap (pending their age). These changes allow seniors to safely tap into home equity and to be financially prepared to age in place.

As the government continues to strengthen rules and regulations, reverse mortgages should be top of mind when retirement planning. Let's not forget that property values and home equity continue to be on the rise. That said, reverse mortgages are certainly an option that deserves further discussion.

If you're interested in remaining at home, mortgage free, and want to learn more about reverse mortgage benefits — give one of our experienced salary-based mortgage consultants a call.

These materials are not from HUD or FHA and were not approved by HUD or a government agency.