There's been a lot written and said about reverse mortgages recently. They are being billed as a tool for retirees, and they can be helpful. Here are six ways that a retiree can benefit from a reverse mortgage.
1. Supplemental Income
Due to the nature of reverse mortgages, you have the option to receive regular payments based on the equity in your home. If you are looking for a little extra income each month, a reverse mortgage can help bridge some of the gaps, especially if you are planning to delay receiving Social Security benefits.
2. You Don't Need to Repay the Loan Immediately
Reverse mortgages are still loans, but it's one that isn't repaid until you move out of your home or pass on. This provides stability to retirees who are looking for supplemental income, but can't make loan payments. A reverse mortgage is paid off by the sale of the home, once you no longer live there. You do need to be careful, though. If you go into a long-term care facility, loan repayment will begin and you might be forced to sell your home to pay off the obligation.
3. It's Possible to Receive a Lump Sum
Reverse mortgages are flexible in terms of payout, so you can choose to receive a lump sum instead of monthly payments. If you are hoping to invest a larger chunk, or planning to make a purchase, a reverse mortgage can provide you with the capital. To estimate your lump sum use our reverse mortgage loan calculator. Plan out your money moves and determine what is most likely to benefit you. Most reverse mortgages can be tailored to meet your financial needs during retirement.
4. Potential Tax Benefits
In some cases, retirees might be tempted to withdraw money from a tax-deferred retirement account to pay off a traditional mortgage. Unfortunately, that large of a withdrawal could have tax consequences since it can bump you into a higher bracket. Using a reverse mortgage to pay off the remainder of your traditional mortgage (if you have enough equity) can allow you to get rid of one monthly bill – since you won't have to make payments on your mortgage – and avoid the tax consequence of a big withdrawal from your 401(k).
5. Reliable Line of Credit
You aren't required to use your credit, but knowing that you have it available can provide peace of mind. Reverse mortgages offer a backstop for your situation. If you don't want to sell investments in your retirement account and lock in losses, turning to a reliable line of credit might help you out. It can also serve as an emergency fund of sorts, as long as you understand the risks that come with fees and interest rates that are a little higher.
6. FHA Protection for Reverse Mortgages
Finally, retirees can benefit when they take advantage of lenders that participate in the FHA's program for reverse mortgages. There are eligibility requirements, but if you meet them, you are protected. You don't have to worry about repaying more than the market value of your home – even if your home's value drops and your reverse mortgage amount is higher than what your home will sell for.
Before deciding to take the plunge, consult with a knowledgeable financial planner who can help you understand reverse mortgages. These products aren't right for every retiree or every situation, so research your options and make a decision that works for your position, and take into consideration the pitfalls, including the fact that your heirs will need to pay off the loan if you pass on and they want to keep the house.
With the right strategy, reverse mortgages can help retirees feel peace of mind and better manage their cash flow.