The Top 3 Reasons To Get a Reverse Mortgage

If you’re approaching retirement, or have already stopped working full time, you might be eyeing your savings and your investment portfolio wondering: will it last?
For at least these three reasons, you should look into reverse mortgages.For at least these three reasons, you should look into reverse mortgages.
For some Americans, the answer is “yes.” For many, it’s “no.” And for a good portion, it’s “maybe.” If you find yourself in the “maybe” category, there are some measures you can take to help ensure that “yes” you will be able to enjoy a long retirement without the ongoing worry of running out of money.

In particular, if you have built home equity over time, like many households have, you may be able to take advantage of a reverse mortgage to help maintain cash flow in retirement.  You could use one as a “rainy day” options should your other investments become exhausted sooner than expected. Or if unforeseen events such as health issues or the need for in-home care arises and you need extra money to stay on target.

“…there are some people for whom a reverse mortgage can truly tip the scale, putting them into the category of folks who, yes, indeed, will have enough to live on in retirement.”

A reverse mortgage is not for everyone, and it’s a loan, which like any loan, must be repaid. But there are some people for whom a reverse mortgage can truly tip the scale, putting them into the category of folks who, yes, indeed, will have enough to live on in retirement.

Here are three reasons you should look into getting a reverse mortgage.

Reason #1: You’re “House Rich.”

Many people enter retirement choosing to focus on what they don’t have—a massive, and well-invested retirement portfolio with the right diversification and product mix to last the test of time. Even for those who have saved, a rising average life expectancy is putting even more pressure on those savings, leading to uncertainty around whether the savings will last.

For many of those very same people, they may actually have a safety net they hadn’t thought of: their home. Many households entering retirement have either paid off their mortgage entirely or have made ongoing payments to the point where they have paid off a large portion of their debt and have built substantial home equity.

Post-recession, many housing markets have recovered to pre-recession levels, and many have also seen home prices grow beyond where they were before the recession.

If you are one of these “house rich,” people, a reverse mortgage is a way for you to tap into that home equity without having to sell the home and move.

A reverse mortgage enables you to access your home equity in the form of a lump sum payment, term or tenure payments (monthly payments for as long as you wish), or as a line of credit that can be drawn on at any time. Unlike a home equity line of credit, a reverse mortgage line of credit cannot be frozen or otherwise canceled by the lender as long as the borrower adheres to the terms of the loan.

Once you close on a reverse mortgage, you can use the proceeds however you choose. The loan becomes due when the borrower passes away or moves from the home.

If your savings and income are low, but your home equity is substantial, this may be a good reason to consider a reverse mortgage on your home.

Reason #2: You Don’t Want to Burden Your Kids.

Increasingly, a subset of the adult population is feeling financial pressure from both their adult children who have moved back home and their aging parents, who need help physically and financially.

Those middle-aged adults “sandwiched” between their aging parents and their kids are known as the Sandwich Generation, and they’re feeling the burden.

“Nearly half (47%) of adults in their 40s and 50s have a parent age 65 or older and are either raising a young child or financially supporting a grown child (age 18 or older),” according to the Pew Research Center. About one in seven middle-aged adults, or 15%, are providing financial support to both an aging parent and a child.

Further, the financial support is often for day-to-day expenses when it is provided, Pew says.

“While most adults believe there is a responsibility to provide for an elderly parent in financial need, about one-in-four adults have actually done this in the past year,” according to Pew. “Among those who have at least one living parent age 65 or older, roughly one-third say they have given their parent or parents financial support in the past year. And for most, this is more than just a short-term commitment. About seven-in-ten of those who have given financial assistance to an aging parent say the money was for ongoing expenses.”

If your children are members of this “sandwich generation,” or even if they aren’t, you may feel strongly about not wanting to burden them with your financial woes and care costs.

“A reverse mortgage may enable you to avoid leaning on your kids by freeing up the cash flow you need to maintain your lifestyle in retirement.”

By opting to receive your loan proceeds in the form of monthly term or tenure payments, borrowers can boost their cash flow on a monthly or annual basis, enough so that you don’t need to rely on your adult children to help you with monthly expenses and day-to-day living costs.

A reverse mortgage also may allow you to remain in your home, rather than having to move in with loved ones. That’s because this type of loan enables you to stay in your home while you receive proceeds. The loan obligation, which won’t exceed the value of the home, becomes due when you leave the home or pass away.

If you are considering leaning on family members to maintain your living expenses, this may be a consideration for taking out a reverse mortgage.

Reason #3: You Have An Investment Portfolio

Contrary to popular beliefs, a reverse mortgage is not just for the “last resort” borrower. In fact, having other investments can be precisely the reason to take out a reverse mortgage, financial experts say.

Say you have a portfolio invested for your future, but it hasn’t yet met your expectations, or perhaps you’ve had to withdraw from it for unforeseen expenses — or worse, you had to draw principal when the market is down.

“…research shows that strategically combining reverse mortgages and investment portfolios can significantly boost sustainable retirement income,”

Tapping into your home equity with a reverse mortgage can allow you to keep you investments longer. In fact, some financial advisors have recently touted this strategy as a way for savvy investors to make the most of their retirement portfolios.

A recent article in the Journal of Retirement points to the rising use of reverse mortgages for this purpose.

“Recent research shows that strategically combining reverse mortgages and investment portfolios can significantly boost sustainable retirement income,” write authors Tom Davison and Keith Turner. “Moreover, in the last three years the regulatory framework has been revised to develop further the market for these instruments.”

Research has indicated the majority of retirees are much better off when they execute on this strategy because it allows them to prolong their investments, or avoid withdrawing from them when there is still upside potential.

“Reverse mortgages are increasingly recognized as a valuable financial planning tool,” Davison and Turner write. “They are now seen as well suited for retirees—not only underfunded homeowners who turn to a reverse mortgage as a last resort, but also those who enter retirement well-funded.”

If you have invested wisely but you’re looking to weather a market downturn, or simply set up a “rainy day fund” in the form of a line of credit, this may be a reason for considering a reverse mortgage.

And, a few reasons not to get a reverse mortgage

Of course, a reverse mortgage is not the right move for everyone.  There are good reasons not to get a reverse mortgage.

If you do not plan to remain in your home for the foreseeable future, a reverse mortgage may not be the best fit. If you are likely to need full time care provided by an assisted living community or a nursing home, likewise, you may want to consider selling your home rather than taking out a reverse mortgage.

For some families, leaving the home to the adult children is a priority, and this is another reason people choose not to get a reverse mortgage because the equity in the home is used to fund the reverse mortgage.

It’s also important to understand that a reverse mortgage is a financial tool that comes with certain requirements. In order to obtain a reverse mortgage, you (and your spouse if you have one) will need to attend reverse mortgage counseling before taking out the loan. You’ll also need to undergo a financial assessment conducted by a reverse mortgage loan officer to assess whether you meet the financial criteria for getting the loan.

As with any loan, a reverse mortgage comes with borrower terms. These include (but are not limited to) upkeep of the property, ongoing payment of property taxes, and maintenance of a homeowners insurance policy. Should a borrower fail to meet these terms, the lender can call the loan due and payable and it will need to be repaid within a set time frame.

Before You Get a Reverse Mortgage

Talking with family members, your spouse, and other trusted advisors is always a good idea when considering a financial product such as a reverse mortgage.

Getting more information from a certified reverse mortgage professional will further help you gauge whether a reverse mortgage is right for you.


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