Conventional wisdom says a reverse mortgage is the last resort for senior homeowners to utilize when all other finances have been exhausted. However, research shows that you can use a reverse mortgage strategically as part of a retirement plan to increase your financial legacy at the end of your life. According to Dr. Wade Pfau, professor at the American College of Financial Services and founder of Retirement Researcher, “The conventional wisdom is the worst way to coordinate spending with a reverse mortgage.” It leads to the “worst probability of financial success” in retirement, which other researchers back.
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A reverse mortgage allows homeowners aged 62+ to access a portion of the equity in their home without requiring monthly mortgage payments. The funds can be taken as a lump sum, monthly payments, or a growing line of credit. A reverse mortgage never gives the bank the title to your home, although it does place a lien against the house as with a traditional mortgage.
Some strategies that you might use by opening a reverse mortgage at the beginning of retirement are:
1) You can improve cash flow by paying off your traditional mortgage and eliminate your monthly mortgage payment (taxes and insurance must still be paid).
2) You can use a monthly payment to delay taking Social Security until your maximum benefit is available or to manage taxable withdrawals from your portfolio.
3) You can open a growing line of credit to manage sequence-of-returns risk for your investments, to insure against unexpected spending shocks such as in-home care, or to protect the value of your home in case of a housing market downturn.
A reverse mortgage can be a powerful tool to increase your probability of financial success in retirement. However, there are also several instances where it should be avoided.
Ryan Champion (NMLS# 2294595) is a Mortgage Advisor and Loan Officer with GM Mortgage Group.
"A reverse mortgage can be a powerful tool to increase your probability of financial success in retirement."
