In a recent post, I tried to dispel some of the common myths surrounding reverse mortgages that have been written since April 2015. In this post, I will explore how the Reverse Mortgage could be used.
Instead of thinking about a reverse mortgage as a last resort after all other assets have been depleted, think about it in conjunction with your other investments and working in tandem with your 401(k) or IRA and your other investments.
The basic premise behind a reverse mortgage is that it’s a product designed to tap an illiquid investment – your home. For many Americans, it is still one of the biggest assets they own. When it comes to using a reverse mortgage to tap the value of the home, there are four options:
1) Lump sum payment
2) Annuity-like stream of income guaranteed for as long as a borrower lives in the home.
3) Fixed payment over a fixed number of years
4) Line of Credit (that grows at a variable rate) that is accessible as needed
It’s option four, the line of credit, that has become most intriguing. The idea is to apply for a reverse mortgage in the early years of retirement and leave it alone for the most part. You take on the line of credit long before you actually need it because the line of credit will grow over time. If held long enough, the line of credit could exceed the value of the home. The line of credit grows, even if the value of the home does not. But the homeowner or the estate would only be on the hook for at most 95% of the value of the home because a reverse mortgage is a “non-recourse” loan.
On top of the flexibility it brings, there are tax benefits too – draws from a reverse mortgage are not taxable.
(Some readers may think about using a reverse mortgage to take equity out of their home to invest it in the stock market. We strongly discourage that kind of thinking.)
This is a compelling new tool that could provide innovative solutions for many retirees. Research is showing that it can extend retirement spending out another 10 years or even more.