A reverse mortgage allows seniors age 62 and older access to the equity in their homes, but should millennials plan on using a reverse mortgage to supplement their retirement income? There isn't a simple one size fits all answer due to the constantly changing economy. Instead, someone contemplating a reverse mortgage in retirement should consider the following.
Basic Requirements for a Reverse Mortgage
In order to qualify for a reverse mortgage, millennials will need to own their home, have significant equity in their home and be 62 or older. While millennials may imagine they'll own their home outright when they retire, life doesn't always turn out as planned. Some people never end up owning a home at all, while those that do own may not have enough equity to qualify for a reverse mortgage when they retire.
Future Interest Rates Matter
Interest rates can have a huge effect on the amount of money paid out through a reverse mortgage. Higher interest rates will generally result in a lower payout while lower interest rates usually result in a higher payout. Since interest rates are a factor of future economic conditions that will occur decades from now, they cannot be predicted with any certainty. For that reason, it is difficult for millennials to rely on a particular amount of income from a reverse mortgage decades from now.
Factoring in Estate Planning
Millennials may feel an obligation to leave their home to their children which may not work with a reverse mortgage. According to the Consumer Financial Protection Bureau, "If your heirs don't want to, or cannot afford to, pay off the loan they will need to sell the home in order to repay the loan." Luckily, heirs will get to keep any money in excess of the reverse mortgage balance if the house must be sold. If the debt exceeds the sale price of the home, heirs won't get stuck with the balance.
Of course, future inheritances don't matter if millennials plan on using all of their money during their life. A home is likely one of the single largest assets most people will ever own, so why not use that money to help fund a fun and successful retirement? Nothing says a person has to leave their home or a large inheritance to their children. Retirees earned their money so they should have the option to spend it as they see fit. Using a reverse mortgage in retirement allows homeowners to unlock the money they tied up in their house and spend on things or experiences they would prefer to have.
Economic conditions may be perfect for a reverse mortgage when millennials retire. On the other hand, every person planning for retirement must be careful they don't put off investing for retirement because they plan to use a reverse mortgage. If for some reason a person doesn't have home equity available, they should make sure they have invested sufficiently so they can retire as planned without a reverse mortgage.
Millennials should think about using a reverse mortgage only for supplemental income in their retirement planning, not for the money they will need to live in their day to day lives in retirement. People nearing or already in retirement that want to see how much a reverse mortgage could help should make sure to shop around and get multiple reverse mortgage quotes to get the best deal possible.