Reverse Mortgages and Retirement Planning

There is currently a lot of talk in the press about how reverse mortgages can be used to supplement your retirement income. Some sources advocate the use of reverse mortgages while others preach against them. First of all, reverse mortgages, like virtually every investment or financial decision, are good for some and bad for others. How they apply to you depends on your circumstances and what you’re trying to accomplish. Let’s set the record straight on reverse mortgages and retirement planning.

A reverse mortgage, as the name implies, is the opposite of a regular mortgage. Instead of making monthly payments on your home mortgage, the equity you’ve build up in your home over the years pays you. To qualify for a reverse mortgage you must meet two conditions: first, every person on the deed must be age 62 or better, and second, you must have enough net equity in your home to make a reverse mortgage loan feasible. The same lenders that offer traditional, or forward, mortgages also offer reverse mortgages.

A reverse mortgage is not related to your ability to repay the loan, having a job, your income or net worth. The only requirement other than being age 62 or better is that the equity in your home must be sufficient to justify the reverse mortgage loan. When you apply for a reverse mortgage you’ll go through the normal steps of obtaining a mortgage: an appraisal, title search, confirmation of insurance coverage, inspection, etc. The reverse mortgage closing costs can be taken from the loan proceeds so you can avoid out-of-pocket costs.

The interest on a reverse mortgage loan is accrued and added to your loan balance. Accordingly, the loan balance will grow throughout the life of the reverse mortgage; however, you have no personal liability to repay the reverse mortgage since the home is the only collateral for the reverse mortgage loan. If the home is not sufficient to repay the reverse mortgage loan, the shortfall is not your concern. When you pass on or move on, the loan can be repaid from the sale of the home with any shortfall being the responsibility of the lender and any excess going to you or your estate. The reverse mortgage can also be repaid by getting another loan, paying the balance from your savings or investments or the children/beneficiaries could repay the loan and obtain clear title to the home.

You cannot be evicted nor can the you be foreclosed as long as you are alive, living in the home, maintaining your insurance coverage and keeping the home in reasonably good repair. If you are married, the reverse mortgage loan is not repayable until the death, or moving, of the last spouse. You can take the reverse mortgage loan proceeds, less closing costs, as a lump-sum, installment payments or have a line of credit established with the lender that you can access at any time. There are no restrictions on how you can use the money from a reverse mortgage: vacations, new car, investments, vacation home, giving money to children, or whatever. Before reverse mortgages you had access to the equity in your home only by selling (and generally moving) or by refinancing (meaning payments would start all over again). This third option — reverse mortgage — is something you need to know about and consider should you ever need the equity from your home to help improve your retirement lifestyle. The reverse mortgage allows you to stay in your home and turn your home equity into spendable cash for other uses. The question is: why would you do a reverse mortgage? First and foremost, you might need the money for retirement or to cover an emergency. Secondly, a reverse mortgage could be incorporated into your estate planning by using the equity in your home to purchase a paid-up life insurance policy to pay tax-free death benefits to your children, charity or beneficiary. Third, you just might want to splurge and take an around-the-world vacation, buy that sports car you’ve always wanted or buy a second home on the lake rather than leaving the equity in your home to be fought over by the kids.

A better question is: why would you not want take a reverse mortgage loan? Many retirees use a reverse mortgage loan to finance investments. In fact, the reverse mortgage specialist helping you might even recommend making an investment with the loan proceeds. Generally, this is not a good idea because rarely will the return from the investments cover the interest and closing costs associated with the reverse mortgage. Far too often, a retiree will unlock the equity in their home using a reverse mortgage loan and then turn right around and buy a long-term investment that keeps their money locked up and out of their reach. This is generally a bad idea.

The one exception that oftentimes makes a great deal of sense is using the reverse mortgage money to purchase a guaranteed lifetime income to supplement your Social Security or other retirement income. A guaranteed lifetme income is generally obtained by purchasing an annuity from a life insurance company. Annuities now allow you to obtain a guaranteed lifetime income but still retain control of your money in case you change your mind about the lifetime income, need a lump sum to cover an emergency or get an opportunity to purchase a higher lifetime income should the economic/financial picture change. By using the reverse mortgage loan, which you do not have to repay during your lifetime, to purchase a guaranteed lifetime income you cannot outlive, you could remove the anxiety and fear of running out of money before your death. All the while you are assured of a place to live, no mortgage payments and the peace of mind of knowing that you’ll have a new income source for the remainder of your life.

The reverse mortgage loan is a great tool that can be used to improve your retirement and you definitely should learn more. But, before taking out a reverse mortgage loan make sure you have a sound reason and have a definite non-risky use for the money or need extra income to supplement your retirement income. If you simply want to “be prepared” just in case you need money for an emergency, leave the reverse mortgage money in a line of credit at the lender.

Generally, the costs associated with a reverse mortgage are no greater than you’d incur if you sold your home to free up the equity, but shop the market for the lowest closing costs. Also, there are several programs – some government sponsored while others are private – and you’ll want to review all your options. Again, don’t do a reverse mortgage just because you want to take the money and invest it hoping to “beat the market” or speculate you’ll make a higher return than the reverse mortgage loan is costing. Also, make sure you get professional help by talking to your banker or financial advisor before proceeding.

Have questions about your retirement investments? View questions and answers in our Expert Archive that we've given to others inquiring about their retirement investments: http://www.theretirementpros.com/ask_expert.php

Join Dr. Shelby Smith's video seminar online (usually 10 min long or less) on safe retirement planning: http://www.theretirementpros.com/Tele-Seminar-MRM.php

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