Blog content updated on 11/1/2021
In a Los Angeles Times article, certified financial planner Liz Weston offers financial advice for homeowners paying off their mortgage in retirement. In this real-world Q&A format, Westin suggests opening a reverse mortgage line of credit as a way for one reader to meet their financial goals—and covers its basic advantages and requirements.
Reverse mortgages allow borrowers to tap into their home equity to get cash for retirement, which can help improve the quality of life and financial flexibility for older adult homeowners.
Would a reverse mortgage be right for you?
Ask your financial advisor if a reverse mortgage might be a good idea in your situation. Over the years, more and more advisors are realizing that a reverse mortgage can be a useful part of an overall financial plan for retirement. It helps provide a reliable source of cash, gives you financial flexibility, and does not require monthly mortgage payments.1
If you’d benefit from improved cash flow and are in good health—meaning, you expect to continue living in your home for the foreseeable future, and won’t need to move to a care facility any time soon—a reverse mortgage may be worth considering.
How retirement funding has changed.
Today, people are living longer than ever—so they need more money to avoid using up their savings and investments too soon. The classic “three-legged stool” of retirement funding used to be enough: Social Security, savings, and pensions. But most older adults find that just doesn’t go far enough these days. They need another source of funds to live the retirement they imagined, comfortably with no financial worries.
Where can seniors turn for a solution?
Since going back to work full-time isn’t an option for most seniors, where will this money come from? One option is to downsize to a smaller, more affordable home to reduce expenses and help savings and investments last longer—but according to a survey conducted by Bankrate, that may not be the most attractive choice for seniors. In fact, 62% of older adult homeowners said they plan to “age in place” and never move at all.2 But for many seniors, staying home may come with significant costs as well—such as paying for home repairs and upgrades (such as walk-in baths, access ramps, and more) necessary to make it a better fit for their aging needs.
The answer might be right there where you live.
Fortunately, there’s an often-overlooked, yet significant source of funds that’s available to senior homeowners: the equity they’ve built in their homes.
When most people think about accessing their home equity, they think of a Home Equity Line of Credit (HELOC). But HELOCs are often a bad idea for seniors for a number of reasons:
- They require monthly payments to be made, defeating the purpose
- They can be reduced or frozen by the lender at any time
- The monthly payment can suddenly spike after 10 years
There’s another way to access your home equity through a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage. It has a number of advantages as compared to a HELOC:
- The proceeds are first used to pay off your existing mortgage, eliminating that payment and allowing you to use the money for something else.
- You can take the remaining funds as a lump sum of cash, a monthly payment to yourself—or as a line of credit, to create a financial “safety net” for future expenses.
- A reverse mortgage line of credit grows over time, and cannot be frozen by the lender.
- With a reverse mortgage, as long as you continue to keep up with property taxes, home insurance, and home maintenance, there are no monthly mortgage payments required. The loan doesn’t come due until the last borrower permanently leaves the home.
- Every reverse mortgage requires independent counseling for your protection. It’s meant to ensure that you fully understand your options and responsibilities, so you can make an informed decision about whether it’s right for you.
How can you use the money?
You can spend it in any way you like. It’s important to be planful and not spend the entire amount all at once on unnecessary things, because the idea is to make your money last longer into retirement. But there are no restrictions on how you can use it. And because the money comes from the equity in your home, the IRS doesn’t consider it as income, so it generally doesn’t affect your Social Security benefits.3
Here are a few common uses for a reverse mortgage:
- Paying for everyday expenses, bills, credit-card balances, or other debts.
- Helping to cover healthcare costs or buy long-term care insurance.
- Take out a line of credit that grows over time, which can provide peace of mind now and financial protection for the future.
- Make necessary repairs or upgrades to help you remain in your home longer.
- Use the proceeds from a reverse mortgage to avoid depleting your savings or invested assets.
- Help family members with their expenses, or pay for a grandchild’s education.
How could you use the extra cash from a reverse mortgage? Ask your financial advisor if a reverse mortgage may be right for you.
To learn more, call 855-523-4326 or fill out the form on this page to get a free info kit. There’s no cost and no obligation.
To access the full Los Angeles Times article, click here.
- Real estate taxes, homeowners insurance, and property maintenance required.
- Bankrate. “6 in 10 homeowners don’t plan on moving out of their house. Ever.” https://www.bankrate.com/mortgages/financial-security-0418/
- Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.
