Insider's View on the Benefits of a Reverse Mortgage

You’ve finally made it.  After what seems like an eternity of getting up early and commuting to work, you are finally retired.  Besides figuring out what you are going to do with all of your free time.  Another question you have to ask is where will the money come from.  For some, it is a pension or an IRA.  For others, it is Social Security, but we all know how that does not help make ends meet.  Then there are issues of paying for unexpected health costs and how to leave something for your heirs.  
 
With that in mind, I wanted to take a look at the insider’s view on the benefits of a reverse mortgage.  This is a financial planning tool which has been around for years, but only recently has started to generate serious interest.
 
First, what is a reverse mortgage?   These programs have been around since the early-1960’s when the first reverse mortgage was written in Portland, Maine.  Since that time there has been a lot of misunderstanding about the program, as well as some changes that you should be aware of.  
 
To enjoy the benefits of a reverse mortgage, borrowers must be 62 years old, own their home, and have a low mortgage balance that can be paid off with a portion of the funds.  If you own the property jointly with your wife or partner, then the bank will take into account the age of the youngest owner when deciding whether a borrower qualifies.
 
These mortgages do not work like home equity or second mortgages.  In fact, reverse mortgages have no monthly payments.  Instead, you only need to pay the property taxes, utilities, and insurance on the property.  The catch is that the house needs to be your primary residence and once you move the loan will be repaid.
 
The mortgages can be a useful financial planning tool for retirees as it helps to reduce their monthly expenses, and depending on their situation, let’s them tap into a large cash reserve right under their feet.  
 
The fact that reverse mortgages are becoming more popular is not surprising.  A number of today’s retirees have had to weather several financial tempests including the dot-com bubble, the housing crisis, and the great recession.  Even if they survived, it was probably not completely unscathed.  So for retirees with little or no money saved up, a reverse mortgage can be a ‘Hail Mary Pass.
 
Reverse mortgages are not without their detractors.  For some, it is the idea of baking in a ‘buffer asset’ into a retirement portfolio.  Whilst others view it as a potentially expensive option – one which should only be used if the circumstances are right.  In the end, it comes down to education. This starts with searching online to reach the ask the experts reverse mortgage section on various websites.  You should also reach out to your financial advisor to get their opinion on how this move would help your nest egg.
 
While there is little doubt that your home holds great value, the decision to get a reverse mortgage should not be taken lightly.  That being said a recent report by CNBC noted that a spike in reverse mortgage application may be around the corner.
 
No doubt this is being driven by the number of cash-strapped retirees.  But another reason is that distributions from a reverse mortgage are tax-free.  Compare this to selling your home where you would have to pay capital gains.  In addition, the interest only accrues on the amount of money you use.  So you won’t owe anything if the line of credit remains dormant.  
 
Another development which has helped improve the popularity is regulation which puts limits on how much equity can be used and what happens to the property when one spouse dies.  Implemented in 2013, these changes weredesigned to protect consumers.
 
Closing costs have also been coming down, and along with the Federal Housing Administration, a number of lenders are offering reverse mortgages with little or no money due at closing.  In some cases, the total out-of-pocket for a borrower can be less than $500.  
 
As mentioned these loans can provide supplemental income for retirees with no savings or pension.  However, a reverse mortgage is not a bottomless well and plans should be taken to make sure that the funds taken out of the equity are carefully managed to ensure they will last.  This is especially true as we begin to live later into our 80’s and 90’s.  As such, a reverse mortgage is no different than other retirement planning tools, in that it requires careful consideration and solid management to make sure it can cover unexpected costs.