It used to be that reverse mortgages were only considered as a last resort – like breaking the piggy bank once all other sources of retirement income have run out. However, this is no longer the case and a growing number of advisers are recommending reverse mortgages for their clients. Now, this is not to say that reverse mortgages are right for everyone. But if you are considering one, then here are five reasons why reverse mortgages can help retirees.
Before we get started, let’s look at what a reverse mortgage is. In simplest terms, these loans allow seniors to tap into the equity they have built up in their homes without having to make any payments on the interest or principal if they live in their home.
These loans have been around since the 1960’s and are only available to seniors age 62 or older. As mentioned, there are no monthly payments but borrowers will have to show that they can continue to pay property taxes, utilities, and homeowner’s insurance.
Perceptions of reverse mortgages are changing. According to All Reverse Mortgage, a direct lender of reverse mortgages in California, the program ‘has helped thousands of homeowners to safely access the equity in their home to better enjoy your retirement years.’
With that in mind, here are the reasons why a reverse mortgage can help in retirement.
Control Your Spending
Living on a fixed income requires discipline, a lot of discipline. For retirees, this means balancing withdrawals from their investment portfolios and savings accounts. However, this can be tricky – especially if their portfolio is comprised on securities – as timing withdrawals can be difficult at best.
This is one way which reverse mortgages can help as the added liquidity helps to balance out withdrawals and in some cases, can even allow retirees to keep the principal in their retirement portfolio. Doing so allows them to grow their account at a time when the added income can help to cover the costs of living longer more active lives.
Another plus of this approach is that retirees can use their reverse mortgage as a line of credit. This way they can use the reverse mortgage to cover regular monthly expenses and then time withdrawals from their core portfolio to pay down the balance.
Delaying Social Security
Did you know that delaying Social Security until the age of 70 can increase the benefit by more than 30%? While this sounds great, for many seniors holding off on applying for Social Security can be difficult to achieve.
Enter the reverse mortgage. By using this tool, senior can get the extra income they need to bridge the gap until Social Security kicks in. Granted, you don’t want to drain all the equity you have built up in your home; but small monthly payments can help to supplement income.
Paying Taxes from IRA Conversions
IRAs are a great retirement savings tool. However, converting a 401(k) or a traditional IRA accounts to a Roth IRA account does have one downside – taxes. Especially if you haven’t reached the age of 70 ½.
As such, a reverse mortgage can give you access to tax-free capital which can be used to pay the taxman when you convert your IRA. I know they should have made it simpler but let’s face it we are talking about taxes here and nothing is every that simple.
Increase the Size of Your Estate
I realize this might sound counterintuitive as one of the biggest concerns about reverse mortgages is how they will affect one’s estate. However, the reality is that a home is a single asset – and one which might rise or fall depending on market conditions.
As such, a reverse mortgage is a way to reallocate some of the equity into different investment vehicles – some which may grow faster than the value of a home. Thus, reverse mortgages can help to increase the size of your estate.
Setting Up a Rainy-Day Fund
Unexpected expenses can be the bain of your retirement as they can deplete the savings you have built up over years. As such, reverse mortgages can help to cushion the blow of expected expenses during retirement. In this way, you can pay the expenses while not having to worry about what will come next.