10 Expected and Unexpected Ways to Use a Reverse Mortgage
A reverse mortgage allows individuals age 62 and older to convert a portion of their home equity into tax-free loan proceeds. This money can be used for any type of spending a borrower has in retirement. The loan can also be used to strengthen a person’s overall financial profile.
Here are 10 fun or smart ways to use a reverse mortgage:
1. Eliminate Mortgage Payments
If you are paying off an existing mortgage, a reverse mortgage enables you to immediately pay off that debt and eliminate those monthly housing payments.
Eliminating mortgage payments is one of the most common ways retirees benefit from reverse mortgages.
A traditional mortgage requires a borrower to make monthly payments on the loan balance. A reverse mortgage, however, does not require any monthly payments, other than requiring borrowers to pay their property taxes, homeowners’ insurance, condo association fees and other applicable property charges.
By not having to worry about monthly mortgage payments, reverse mortgage borrowers experience improved cash flow and more financial freedom.
2. Buy a Small Boat and Fund Cruises
Tim loves his home on the water. However, he missed having a boat out front and the excursions he would take on it. He had sold his 40-foot trawler to help make ends meet but with his savings depleted, he was still having trouble keeping his whole life “afloat.”
To make his budget in retirement work, Tim decided to get a reverse mortgage. The reverse mortgage enabled him to buy a small Boston Whaler so he could get out on the water on a regular basis. There was also enough in the account to enable him to go on a couple of inexpensive cruises a year. Since getting the reverse mortgage, he has visited Mexico and Belize plus a few bus trips to the casinos in Louisiana and Nevada.
3. Cure Loneliness
Isolation hurts seniors, says Ellen Skaggs, reverse mortgage national sales manager at New American Funding in Tustin, California. Under some circumstances, Skaggs notes that borrowers have used a reverse mortgage to purchase a home closer to family and friends. A little-known fact about reverse mortgages is that they can be used to buy a new home. The program is called HECM for Purchase.
Last year, Skaggs worked with Charles, a borrower who had lived in his home for 30 years. His wife died a few years ago and he recently attended a high school reunion and reconnected with old friends who all still lived in their hometown. After hearing about the HECM for Purchase, Charles sold his home and used the reverse mortgage to move back to his old neighborhood where he is now surrounded by good friends. They have reconnected over their passion for fixing old cars.
The HECM for Purchase is a reverse mortgage that allows eligible borrowers to both obtain a reverse mortgage and buy a new residence — all within a single transaction. This helps borrowers limit the closing costs they would pay if both transactions happened separately.
4. The Convertible He’d Always Wanted and Efficient Use of Resources
John had been in a car accident. His old car was totaled and he decided that he wanted to splurge to buy the convertible he had always dreamed of owning. He had saved a lot over the years, but his assets were in the stock market and — at the time — the market was down. If he withdrew the money he needed to buy a new car, he would be selling stocks at a loss.
Luckily John had secured a reverse mortgage line of credit last year in order to give him more financial flexibility and choices. He was able to withdraw funds from the line of credit instead of selling his assets at a loss.
If a person takes out a reverse mortgage at the earliest possible age (62) in the form of a line of credit payout, researchers have shown that there is a greater chance for a retiree to sustain his/her retirement spending over a lengthy retirement.
The idea is to take a HECM early in retirement and only draw from the credit line when the need for additional funds arises. By doing so, retirees can avoid spending down their 401(k)s or other personal savings.
Having access to an extra pool of funds can also prevent retirees from prematurely selling off assets, like stocks, when the market is down. By drawing on the reverse mortgage credit line, retirees can still maintain their cash flow as they weather any market volatility.
5. A New Luxurious Bathtub and Other Home Projects
Bill’s wife June has severe arthritis. They used some of their reverse mortgage money to remodel their bathroom and included a whirlpool bathtub. The space is beautiful and the tub helps relieve some of June’s aches and pains.
When more than 1,000 adults ages 55-75 were polled by The American College of Financial Services earlier this year, 83% said they plan to remain in their current home for as long as they possibly can.
While aging in place seems to be the goal for many retirees, the reality is that as we age, our homes may no longer support our physical needs. For this reason, reverse mortgage borrowers commonly use their loan proceeds to retrofit their properties to be better suited for them as they age.
Adding features like grab bars in the bathroom, stepless entries and access ramps outside the home can be easy to tackle. If you live in a two-story home, installing a chairlift or residential elevator might be worth the consideration if you don’t plan to downsize into a smaller abode.
6. Improve Lifetime Income Prospects — Delay Social Security draws
Age 62 is the earliest a person can begin receiving Social Security benefits. It’s also the earliest age a person becomes eligible for a reverse mortgage.
If you were born between 1943 and 1954, your full retirement age is 66, according to the Social Security Administration. While you may begin receiving Social Security payments at 62, you will only get 75% of what you could be getting if you wait till age 66 to start benefits.
Older homeowners have commonly turned to reverse mortgages as a means to supplement their retirement spending until they can receive the maximum Social Security benefits afforded to them. This might be an especially good idea if you suspect that you will live a long life.
7. Fund a Family Golf Tournament
Reading books, watching “Jeopardy,” playing golf and family gatherings at her own home are Anne’s favorite things in life.
However, Anne had rapidly run out of money in retirement after an income producing investment went bad. Not wanting to lose the home where her children and grandchildren often gathered, Anne secured a reverse mortgage.
She put most of the money in a line of credit from which she takes withdrawals to make ends meet each month.
Additionally, to celebrate the financial decision, Anne used a small portion of the proceeds from her loan to host a weekend golf tournament for her 7 children and their large families. Everyone wore crazy golf clothes — plaids pants and fun hats — and had a memorable time.
8. Protect Non-Borrowing Spouses
In the case of a borrower and a much younger spouse, a reverse mortgage can help alleviate concerns about what might happen if the borrower dies before the younger, non-borrowing occupant.
“The solution was that they used some of the loan proceeds to buy a life insurance policy (on the borrower) to cover the amount of the mortgage, so if the borrower died, the non-borrowing occupant would have the loan paid off,” says Mike Gruley, a Plymouth, Michigan-based loan originator who holds the Certified Reverse Mortgage Professional designation from the National Reverse Mortgage Lenders Association.
This helped protect the non-borrowing occupant from being displaced from the home, should the borrower pre-decease the non-borrowing occupant, which in this case was likely, Gruley added.
9. In Home Care
Bob developed Alzheimer’s two years ago. His wife Terry was able to care for him in the first year, but then the responsibilities became too great. She did not want to put Bob in a home, but she could not afford the help they needed.
By getting a reverse mortgage, they were able to fund in home care for Bob and set themselves up to be able to live in the home for as long as they both live.
10. Paying Taxes on Roth IRA conversions
If you plan to minimize the amount of income taxes paid during retirement, you might consider converting a traditional IRA into a Roth IRA. Retirees typically make this conversion if they want to pay as little income tax as possible during their non-working years.
When converting a traditional IRA into a Roth IRA, you pay income tax on the contributions. This taxable amount that is converted is then added to your income taxes and your regular income rate is applied to your total income.
“In the conversion process, distributions from IRAs are taxed as ordinary income, and experts often recommend paying those taxes with funds outside of the IRA, because using money from the IRA for that purpose generates even more taxes,” writes personal finance expert Robert Powell for MarketWatch.
Tax-free proceeds from a reverse mortgage can help pay for these Roth conversion taxes, thus preventing a retiree from potentially moving into a higher tax bracket.
How Would You Use a Reverse Mortgage?
Reverse mortgages have many different uses, but they aren’t the right solution for everyone.
To determine if you qualify for a reverse mortgage and if it is a good fit for your financial plans, try the free online Reverse Mortgage Suitability Test.