Is A Reverse Mortgage a Good Idea for Retirement Income?
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You can use the "equity" or value of your home to build wealth, generate income or protect your nest egg by renting, selling or refinancing your residence. But, these options usually require you either to move out or increase your loan payments. With a reverse mortgage, you keep your home, forgo mortgage payments and even take out cash, but you'll have to wait until you're at least 62 to make this a viable part of your retirement plan.
Reverse Mortgages: The Basics
A typical mortgage is known as a "forward" loan. The lender fronts the money, and you make payments until you sell the house or pay off the balance, which shrinks as the loan is paid down.
A reverse mortgage works in the opposite way. The lender gives you money upfront based on the equity in your home, and you owe nothing until:
- The death of the last remaining homeowner.
- You sell or refinance the home.
- You rent the home long-term or stop using it as your primary residence.
Until one of these events occurs, the amount of the loan balance grows, rather than shrinks, as you receive money from the lender or tap into the reverse mortgage line of credit.
Ways to Receive Reverse Mortgage Payments
A reverse mortgage benefits seniors who wish to supplement their income or who simply want extra money at their disposal should they need it. The flexibility of reverse mortgages gives homeowners control over how much of their home equity to use. You can tap into your home's equity through several reverse mortgage arrangements:
- Tenure: receive equal monthly payments indefinitely as long as you live in your home.
- Modified tenure: receive equal monthly payments combined with a line of credit as long as you live in your home.
- Term: receive equal monthly payments for a fixed amount of time.
- Modified term: receive scheduled payments for a fixed period combined with a line of credit.
- Line of credit: tap into equity whenever you want to, until it's depleted.
Reverse Mortgages Can Work for You in Retirement
Research shows that using a reverse mortgage, along with other retirement strategies, can help protect your overall portfolio and improve your retirement outlook.
Wade Pfau, professor of retirement income at the American College of Financial Services, studied the effects of reverse mortgages on homeowner wealth in retirement. According to Pfau's study, integrating a reverse mortgage into your retirement plan can reduce the negative effects of poor returns on other retirement investments.
Take Your Time With a Reverse Mortgage Line of Credit
Pfau advises homeowners in their golden years to obtain a reverse mortgage line of credit as early as possible. But his research shows that dipping into or depleting that line of credit too early can be risky. Allowing the line of credit to grow for as long as possible without withdrawing money can actually result in a credit line that ultimately exceeds your home's value, giving you a bigger base for income in retirement.
Reverse Mortgage Risks
A reverse mortgage can be a good idea in retirement for homeowners who:
- Can afford to maintain their homes in good condition.
- Have enough income or assets to pay their homeowner's insurance premiums and property taxes on time — failing to pay these non-mortgage recurring costs can lead to foreclosure.
- Don't mind leaving little to no equity to heirs.
To ensure that homeowners understand the potential risks and benefits of reverse mortgages, retirees must receive reverse-mortgage counseling from an agency approved by the Department of Housing and Urban Development. When the last surviving homeowner dies, heirs must sell the home or refinance the property to pay off the reverse-mortgage lender, which sometimes results in less equity for the heirs.