How Can Reverse Mortgage Funds Be Used?
How can I use a reverse mortgage?
— John
The short answer: spend it any way you like. There are no restrictions on how you use the money from your reverse mortgage, and you can fund anything you like. To give you some examples, below are some common uses for reverse mortgage proceeds:
Paying Bills
Everyone could use a little more money every month. Because no monthly mortgage payments are required, you can choose to redirect the money you would use to pay the mortgage toward other things—everyday expenses, bills, credit-card balances or other debts. Keep in mind that you’ll still have to keep current with property taxes, homeowners insurance, and home maintenance.
Offset Healthcare Costs
Today, many retirees want to “age in place,” so they can remain in their homes and not have to go to a senior community, assisted living facility, or downsize to a smaller home. The funds you receive from a reverse mortgage can help make it possible.
Plan for the Future
A reverse mortgage loan allows you to establish a line of credit1 to make sure that you’re better prepared for unexpected expenses, or to help pay for long-term care. This financial “safety net” can help provide peace of mind today, and financial protection in the future.
Update Your Home to Fit New Needs
Making much-needed repairs, or modifications to fit your needs as you age, can help you live more comfortably and remain in your home for a longer period of time. A reverse mortgage can help make it easier to afford these updates and improve your quality of life.
Lower Your Taxable Income
You can avoid making taxable withdrawals from 401(k) or other retirement plans by replacing this money with reverse mortgage proceeds which are income tax-free.2 This may also allow you to delay drawing funds from your retirement account, so they can continue to grow.
Help the Ones You Love
You can use the equity in your home to help others. For example, you could use the proceeds from a reverse mortgage to help a child or grandchild with major expenses, such as college tuition or a down payment on their first home.
Sounds good, but how can I be sure it’ll work for me?
— John
Reverse mortgages aren’t for everyone. FHA underwriting requirements ensure that only qualified borrowers age 62 and older can take out a reverse mortgage loan.
At Longbridge Financial, we assess your financial situation to ensure that it’s a good fit for a reverse mortgage. We’ll take the time to ask questions about your goals, your home, and your finances. We will help you determine what reverse mortgage solution is right for you. Not all lenders make this commitment.
It’s a good idea to gather information and explore your home-equity options early on, so you can discuss important financial decisions with family or advisors you trust. Longbridge will provide you with the facts and information you need to decide if it’s right for you.
Here are some questions to consider before applying for a reverse mortgage:
Do you need to tap into your home equity now or should you save it for an emergency?
Accessing your home equity is a big decision. In the past, most homeowners were advised to save equity for emergencies. But studies published in the Journal of Financial Planning suggest that tapping equity earlier, and retirement funds later, might be a better strategy to help extend the life of your assets. Setting up a credit line1 for future use can be a great way to protect yourself from downturns in the real estate market and ensure that the equity you have today will always be available when you need it.
Are you on a fixed income with no other assets?
You have to be certain that your income allows you to keep up with your obligations—if you take out a reverse mortgage loan and then have trouble paying your property taxes and homeowner’s insurance, you could face foreclosure. So it’s important to have a plan in place for how you’ll pay these expenses.
How long do you and your family plan to live in the home?
A reverse mortgage makes the most sense if you plan to live in your current home for at least 3 to 5 years. The FHA mortgage insurance, which is there to protect you and the lender in case your loan balance ever grows to be more than your home is worth when the loan is repaid, carries an upfront premium. That premium, and the closing costs associated with any home loan, can make reverse mortgages an expensive way to borrow money IF you don’t plan to stay in your home.
Would your spouse or partner want to keep living in the house without you?
It’s important to discuss this question carefully as a couple. If you’re married, talk to your lender to determine if your husband or wife may qualify as an eligible non-borrowing spouse on the loan. After the passing of the last surviving borrower, an eligible non-borrowing spouse can remain in the property and defer the reverse mortgage becoming due and payable. However, they will not have access to any remaining funds in the reverse mortgage which were available to the borrower, and they must continue to meet loan requirements (paying taxes and insurance, and maintaining the property) to prevent the loan being called due and payable for other defaults. If your spouse is deemed ineligible, they will not receive this deferral period, and the loan will become due and payable after the passing of the last surviving borrower.
- Line of credit option is only available for adjustable rate HECM products.
- Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.
