• Question
  • Should I Use Retirement Funds to Secure a Reverse Mortgage?

    Asked on 6/22/2011

    I do not have enough equity to qualify for a reverse mortgage yet. I am considering using some of my retirement funds to pay down the mortgage to qualify. Is this a good idea. I have little income besides Social Security and an annuity. Not having a mortgage would greatly ease my life.

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  • Categories: Housing, Tapping home equity

Answers

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  • *Answer Provided by Bud Hebeler*

    Thank you for asking for my views. I can't see the future any better than you in all likely hood. Without knowing any specifics, I would offer the following comments.

    In my comments below, I assume that there is some impediment in going back to work. If not, that may be the first step to take.

    Also, I assume that you have decided not to seek the help of a professional financial planner with a CFP degree. I strongly believe that people nearing retirement should seek at least a one time review from someone who will not saddle you with prohibitive costs from high fees and kickbacks from the investments he/she recommends. You might want to look at www.napfa.org.

    It may make sense to pay down your mortgage with retirement savings providing that the money will not be coming from a deferred-tax account like an IRA or 401(k). Even that would be OK if the draws would be small enough not to increase your income taxes of if you have already reached the age for Required Minimum Distributions and would use those distributions.

    It is my personal view that reverse mortgages are a last resort. I don't think that people should consider them early in retirement because I feel that your home should only be used for income late in life after inflation and expenses have pretty much exhausted your other resources. Others do not agree with me, but I feel they are presuming a benign future--something that I think is a pipe dream considering the extreme national debt and the baby boomers' savings shortfalls.

    If future inflation is very high as I expect, then an early reverse mortgage will put you at a great disadvantage. That's because you have become committed to a fixed income that's poor inflation protection while a house with a mortgage may well be one of the best investments in that climate.

    So my main point is to get some professional advice considering the resources you have before getting committed to a reverse mortgage. There are cases where a reverse mortgage may be the best solution, but you should look at other alternatives as well before making such a large commitment. A CFP can help here.

    Bud

  • Login to rate this answer:   Answered on 6/22/2011
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  • If your retirement investments are not generating more income than the interest rate from the mortgage loan , then you can use the money you have saved to pay of this debt So for example you owe $100,000 on the mortgage at 6% if you are able to generate with $100,000 a greater return than 6% - lets say you are able to invest and get a return or 9% - then ultimately you are okay with the mortgage because the money you have is working for you now if you have this money sat in the bank then you are loosing not only all the interest on the mortgage loan - but inflation and fees are eating at your hypothetical $100,000 in this example If you believe that a reverse mortgage would ease your life then consider one - they are safe - private - you keep the home - you have to pay property taxes and insurance but you receive tax free income/lump sum you can use your retirement fund to pay down the mortgage - then qualify for one - changes coming this October so consider one now also the reverse mortgage is a good hedge against prices dropping - what if home values keep dropping? how will this affect your portfolio- will you be able to pay mortgage if rates go up or if there is less equity do you have enough money to pay it down well then you got a reverse loan - banks are now paying you so you are fine- you cannot go into foreclosure - then values go back up you have more options again to sell, move, or get another reverse this can be a good strategy for you - also put some more money in your pocket ( lifetime monthly income)

  • Login to rate this answer:   Answered on 7/11/2011
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  • When a homeowner doesn't have enough equity, it's referred to as a "shortfall", and they need to contribute money to offset the shortfall, to enable the Reverse Mortgage to happen.

    If you decide to use retirement funds, it may be easier for you to provide the shortfall during the loan process. Your Loan Officer will let you know how much money you'll need to contribute, and you'd provide it in the form of a Cashiers Check, to the Escrow company when you sign your final loan documents. You can also wire the money, instead of providing a Cashiers Check.

  • Login to rate this answer:   Answered on 10/16/2011
**All above answers are provided as general information only. No warranty is made regarding the fitness or accuracy of the information provided in this answer. You should seek advice from a licensed CPA, attorney or CERTIFIED FINANCIAL PLANNER™ as to your unique financial situation.