You have likely heard age-old sayings like “ignorance is bliss” and “whatever you don’t know, won’t hurt you.” But when it comes to retirement planning and where reverse mortgages fit into the equation, what you don’t know can actually be hazardous to your ability to live comfortably during your non-working years.
Retirement income planning is complex. More often than not, crafting a plan that best suits your individual needs requires the consideration of many moving parts, not the least of which requires answers to questions such as when do you plan to retire, for how long, and how far will your savings take you?
To complicate matters even more, there is also a wide variety of investments to choose from as you plan for your financial future. Often times, one of the most important assets retirees currently have at their disposal is one of the most overlooked investments that can support their retirement in a meaningful way. The answer: home equity.
A largely misunderstood asset
For homeowners age 62 and older, a reverse mortgage allows them to convert a portion of their home equity into tax-free loan proceeds, which they can use without restriction. Unlike a traditional mortgage, reverse mortgage borrowers receive payments from the lender in the form of their home equity.
As borrowers access their home equity, the reverse mortgage loan balance increases. Borrowers are not required to make monthly mortgage payments toward the loan balance, however, they must continue to pay their property taxes and insurance associated with their property. The loan balance becomes due and payable when the borrower dies or otherwise vacates the home secured by the reverse mortgage.
Retirees have typically turned to reverse mortgages to increase their cash flow in retirement, which has helped them meet a variety of spending needs, such as paying for the costs of in-home care and modifying their homes to better support their physical needs.
Aging in place is especially important for people nearing or already in retirement, according to a survey by The American College of Financial Services, which found that 83% of adults age 55 and older said they don’t want to relocate in retirement.
Despite this vast majority of retirement-age Americans who want to continue living in their current homes for as long as humanly possible, only 14% considered using a reverse mortgage to aid them in this desire.
One of the main reasons why reverse mortgage considerations fell short was because 7 in 10 survey respondents were generally misinformed about these products, especially when it comes to using reverse mortgages as a retirement tool.
Strategic retirement planning
As previously mentioned, reverse mortgages can be used to meet a variety of retirement spending needs. But they can also be used to supplement other retirement savings and investments a person might have.
Because there are a lot of misconceptions out there today—as evidenced by the survey responses—The American College says products like reverse mortgages need to be given a second look by consumers, as well as financial advisors who might not be up-to-date on the latest research.
Such research has shown that home equity, when accessed through a reverse mortgage line of credit at the beginning of retirement, can provide a valuable source of cash flow that takes pressure off of having to spend from investments such as 401(k)s and Social Security.
This occurs because the reverse mortgage credit line grows over time, typically at the same rate at which the loan accrues interest. If left untouched for several years, the balance in the credit line could grow significantly, thus giving the borrower a sizable pool of funds to help supplement their retirement.
“Hopefully that’s the biggest takeaway from this survey,” said Jamie Hopkins, professor of retirement income planning and co-director of The American College New York Life Center for Retirement Income Planning. “Advisors and consumers need to start thinking about home equity, including reverse mortgages, as part of the retirement income planning process.”
If you would like to know more about reverse mortgages and how they can be used as part of a strategic retirement income plan, contact your trusted financial professional or visit HUD.gov