Reverse Mortgages – More than Just a Last Resort

Prior to some new rules being implemented in 2009 and 2014 and an overhaul of the government’s insurance program in 2013, reverse mortgages were considered to be a last resort for cash-strapped seniors. They were in fact considered a “pariah” among financial planners and were rarely if ever discussed in academic programs across the country.
In the past, reverse mortgages were taken out by people who really shouldn’t have. Perhaps they were taking the reverse mortgage to pay off high debt loads, or they entered into them without having the resources to cover their annual property tax and insurance payments. In other words, they were given to people who had no other assets.
But findings from Barry and Stephen Sacks published in the Journal of Financial Planning shows how reverse mortgages, when used carefully, can help seniors ensure they will not run out of money during retirement.
According to Sacks’ research, using a reverse mortgage could in fact result in a higher net worth at the end of life than other, more conventional methods of retirement planning.
First, changes to rules in the last few years cap the amount of equity a homeowner can tap into. According to a report from Bloomberg, if the borrower qualifies for a 5.5% interest rate, they can tap up to 48% of their home’s value. If they qualify for a 7% rate, the max amount drops to 36%.
Many financial advisors are now embracing reverse mortgages as a solid strategy for preserving other cash assets like stock/mutual funds, Social Security and more.
For example, if a retiree can delay their Social Security until 65 rather than taking it at 62, they can receive a much higher amount each month. Also, if their investment accounts are not doing so well, a reverse mortgage can help those investments recover or even grow more.
They also can help boost cash flow since a homeowner will no longer be making traditional mortgage payments. Money a homeowner receives from a reverse mortgage isn’t taxable either since you are tapping into equity. Additional withdrawals from investment accounts can possibly carry a high tax burden.
Of course, reverse mortgage are not for everybody, but considering them as part of a broader plan may help seniors have a more comfortable retirement.
When evaluating your choices, it’s important you speak with an independent financial consultant, family and close friends before making any decisions.