The old notion that reverse mortgages should only be taken out as a last resort simply is no longer true today. In fact, I believe there are five ways reverse mortgages can improve your retirement income plan.
First, a definition: A reverse mortgage is a way to convert home equity from your primary residence into a usable resource if you are at least 62. It is truly a mortgage in reverse. The lender provides a benefit based on the amount of equity you have in the home. Unlike a traditional mortgage, payback is optional. But you do need to make timely payments of property taxes and homeowners insurance.
There is a healthy skepticism about reverse mortgages, and that’s not necessarily bad, because people should exercise caution when utilizing debt. But reverse mortgages can improve retirement spending outcomes in a sensible way.
Here are five ways a reverse mortgage can improve a retirement income plan:
1. Spending Coordination With Your Portfolio
2. Bridge Income for Delaying Social Security Benefits
3. Funding to Pay Taxes for Roth IRA Conversions
4. Providing Larger Inheritances for Heirs
One of the overlooked benefits of a reverse mortgage is that its’ a protective hedge against the value of your home. In other words, your borrowing capability grows regardless of the price of your home. Even if the home price plummets, you can keep generating retirement income. When the house eventually needs to be sold, such as after the death of the second spouse, your heirs won’t be on the hook for the debt.
5. Contingency Fund for Unexpected Spending Needs
In retirement, you could run into unexpected expenses. Your health could take a turn for the worse. A dear family member might need financial support. An injury or sickness might require long-term care.
Having access to a reverse mortgage line of credit could make a tremendous difference in such instances. Regarding long-term care costs, a reverse mortgage is typically more suited to pay for in-home care than nursing home care. That’s because you might not be allowed to keep a reverse mortgage open if you’re in a nursing home for more than a year.
A reverse mortgage could also help cover all, or a portion, of your long-term care insurance premiums.