Retirement should be a time to enjoy the fruits of your labor, but for many, the reality is that their savings run low far too quickly. This fear is unfortunately commonplace among Americans today, with a report by Greenwald Research showing that nearly 80% of the American population agree that there is a retirement crisis.1 There are a few factors contributing to this negative perception, and the issue is only compounded by the combination of increased life expectancy and rising cost of living. This two-pronged challenge – having to prepare for a longer, more expensive period of time – means that more retirees find themselves facing depleted assets and financial strain during what ought to be their golden years.
When faced with this financial shortfall, some turn to personal loans or credit cards to bridge the gap, but these options often come with high interest rates that can jeopardize or worsen financial stability over time. If using a credit card to consolidate debt, interest rates can run between 20%-30%, while a personal loan can range between 8%-20%.2 Whew! With these soaring interest rates, it can be difficult to maintain payments down the line.
Fortunately, there is another option that offers a lifeline – a reverse mortgage. Also known as a Home Equity Conversion Mortgage (HECM), a reverse mortgage could allow you to tap into your home equity to access funds without the need for monthly mortgage payments so long as you keep up with your real estate taxes, homeowners insurance, and property maintenance. This solution not only preserves your financial resources but also offers a range of benefits that give you greater control over your retirement. With a reverse mortgage, you can unlock the power of your home and make the most of your retirement years, free from worries of financial strain.
Financial Benefits
As the saying goes, “Money can’t buy happiness.” But that doesn’t mean that financial stability can’t help you find greater peace of mind and build the life you dream of at any age. So, of course, it is beneficial to understand the financial opportunities that come with a reverse mortgage loan!
- Lower your taxable income: Right off the bat, it may be a relief to know that the IRS does not consider reverse mortgage proceeds to be income. This means the funds are income tax-free,3 and you can still use them however you would like! If you put the proceeds towards backing your spending, you can prevent or delay withdrawing from 401(k) or other retirement plans (which are taxable) and, therefore, lower your total taxable income. This means there can be both direct and indirect tax benefits to using a reverse mortgage to fund your retirement spending! As always, you should speak with a financial advisor regarding any tax impacts on your overall financial strategy.
- Monthly mortgage payments are optional: With a reverse mortgage, you can say “goodbye” to monthly payments.4 That’s right, you read that correctly. So, this flexibility means that you can instead choose a payment plan that works best for you, whether that means making payments at whatever pace you would like over time or simply waiting for the loan to become due.
- Pay off your existing mortgage and consolidate debt: The proceeds you receive from your reverse mortgage may be used upfront to pay off any existing mortgage and consolidate your debts. The benefits of freeing yourself from these payments are two-fold. Firstly, you eliminate the accrual of interest on balances you owe that can grow over time. And secondly, you help your future self out by liberating yourself from monthly payments4 that tie up cash and take away your ability to make other purchases and fulfill other expenses.
- Your line of credit grows over time:5,6 When you take out a reverse mortgage, you may receive the funds as a lump sum, in monthly payments, as a line of credit, or in a combination of these different methods. When you open up a line of credit to access the funds over time, the unused portion does not simply sit stagnant. Instead, it grows over time! The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan. This healthy increase in your line of credit protects your cash over time and helps your financial position remain strong throughout the duration of your loan.
- Avoid dipping into savings and other invested assets: The funds from a reverse mortgage can be used for everyday payments, consolidating debt, and larger expenses such as healthcare, emergencies, or home improvement projects, among other things. This financial boost means that you have increased spending power you might otherwise not have been able to achieve without accessing your savings and other invested assets. Leaving these accounts alone for as long as possible means they could continue to collect interest and grow over time, further protecting your funds for down the line in retirement. For the same reason, you may also opt to delay cashing in on Social Security payments, thereby allowing the amount you can expect to receive to have a higher ceiling.3
Personal Benefits
While monetary advantages are certainly plentiful with a reverse mortgage, it is also critical to understand how a reverse mortgage will practically impact your life from a more personal lens.
- Age from the Comfort of Home: For many, the thought of leaving the home they’ve spent invaluable time building memories and relationships is distressing. According to research done by the University of Michigan, among adults aged 50-80, a stunning 88% feel it is important to age in place as long as possible.7 A reverse mortgage allows you to stay close to your family and friends, ensuring that you remain an integral part of your local community you’ve invested in over the years. Not only can you use the funds to make sure your finances allow you to continue to live your life up to the standard you have set for yourself, but you can also execute home improvements that make your home fit for your changing needs as you age. The stability of remaining in your home can be crucial for your emotional and mental well-being, as it enables you to maintain the relationships and routines that matter most to you.
- Enjoy Spending Flexibility: The proceeds from your reverse mortgage loan offer significant leeway for you to manage your finances in retirement. As previously mentioned, there are a number of ways to flexibly arrange how you receive your funds (from monthly payouts to a line of credit, lump sum, or even a combination5) and how you can use them. The additional cash flow can be used to increase your budget for daily expenses, provide freedom to pursue interests or hobbies, or even give you the means for larger purchases such as trips with friends or family. This control over where you direct your funds can truly be life-changing. It puts you in a position to dictate financial priorities and put cash towards addressing problems or pursuing opportunities that are closest to your heart.
- Achieve Autonomy in Decision Making: When you reach a point of financial stability through a reverse mortgage, you retain autonomy over key decisions. This can present in a number of different ways across all domains of your life. You can choose the best healthcare options, pursue home renovation projects that directly address your needs, and allocate the rest of your resources as you see fit. Making your own decisions in spending gives you power over your personal life on your own terms and allows you to focus on the most important people and personal matters that define your life.
- Bolster Your Rainy Day/Emergency Fund: Though it is valuable to think about the freedom that comes with a strong financial position, it is equally important to establish a safety net. The proceeds from a reverse mortgage allow you to do this. You can ensure that in creating your personalized payment plan, you consider how to create an emergency fund that is accessible whenever you may need it. Life is predictably full of unexpected events, whether there is a medical emergency, natural disaster, or personal crisis, such as divorce. Having a cushion to fall back on gives you the power to live with confidence, thinking about how best to enjoy yourself and pursue your passions rather than worrying excessively about negative outcomes.
How do you know if a reverse mortgage is right for you?
All of the benefits of reverse mortgages are certainly appealing; however, like any financial decision, it is important to consider whether it is the best move given your personal circumstances. To qualify for a reverse mortgage, you must meet certain conditions of eligibility. As a borrower listed on the home’s title, you must be 62 years or older and live in the home as your principal residence. Additionally, you can’t have outstanding federal tax liens, must have made your property tax payments dating at least two years back, and the home has to meet the minimum property standards set by the U.S. Department of Housing and Urban Development (HUD). However, if you do not currently meet all of these eligibility requirements, do not worry! There are steps you can take to get on track, such as getting up to date with your property tax payments, waiting to turn 62, or even using the funds from the reverse mortgage to get your house up to the HUD standards.
Notably, you do not necessarily have to live in a single-family home to qualify. Certain homes meeting specific requirements can be eligible for a reverse mortgage even if they are classified as a condominium, manufactured home, or multi-family home.
A common question many borrowers have is, “How much can I borrow?” If you are looking to get a quick estimate of how much you can access, check out Longbridge’s Reverse Mortgage Calculator. Of course, the exact amount will depend on a few factors, with the main one being your home value. Getting started on a reverse mortgage right now can be a great idea – especially while home values are still high. This is a great way to maximize the proceeds you can receive and arrange the terms of your loan to allow yourself the financial flexibility you need.
Because each homeowner’s situation is different, there are going to be variations in the amount of equity accessed and the way funds are used. This, of course, means that the exact financial and personal benefits of a reverse mortgage are going to look different for everybody. If you would like to get more individualized information about using the power of your home to live the life you imagine, it is best to speak to a professional. Reach out to Longbridge to connect with a knowledgeable Reverse Mortgage Consultant today!
