Reverse Mortgage – Immediate Need vs. Future Planning?

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A reverse mortgage can be used by anyone that is 62 years of age or older. That’s a large segment of the population, and one with many different needs. It is hard to generalize about the specific needs of a certain age range because one never knows how long they will live, but it’s safe to say that using a reverse mortgage to fill an immediate financial need is commonplace. Some typical examples:

  • supplementing income with a payment stream from the loan
  • taking out cash to repair a home
  • paying medical bills
  • eliminating an existing mortgage

With the talk of Baby Boomers retiring with a median savings of $120,000, home equity will need to be strongly considered as a part of their retirement plan.

Reverse Mortgages & Retirement Plans

A man looks at a sign reading "Road Ahead"There’s a new school of thought that is picking up steam in the reverse mortgage world and amongst some financial planners. It’s about using a reverse mortgage as the third leg of the retirement ‘stool’ concept since pensions have largely gone the way of the dodo bird. The other two legs making up the stool being social security income and investments/savings (401K, IRA, Stocks, etc.).

Reverse mortgages are being considered now more than ever, and a lot of it has to do with people getting past their preconceived notions of the product. Another factor is the difficulty in obtaining a conventional loan, especially at the time you need it most, usually once you’ve run out of other funds. When you consider the cash flow advantages of using a reverse mortgage as opposed to a conventional cash-out refinance or a home equity line of credit (HELOC), a reverse mortgage may be a much safer decision since no monthly repayment is required.

The emphasis should be on doing retirement planning early as there could be a major advantage over waiting until you are out of savings to do a reverse mortgage. The key is to figure out the answer to two important considerations.

Where Do You Wish to Live?

The first is to evaluate where you intend to live the rest of your life? Are you content living the rest of your life in your current home or will you move again? The answer to this question is very important in which reverse mortgage utilization strategy will be recommended.

How Robust Are Your Savings?

Couple Calculates their budgetThe second question is how long will your savings last? If you continue to spend the same amount (or take into consideration an annual increase in cost of living), when will you run out of funds? If the answer is 100+, you probably don’t need to include home equity as part of your retirement plan. If the answer is 70-80, it is pretty clear that you will need to turn to home equity at some point. Why not treat it like other investments and maximize the longevity of the home equity?

Setting a Course for the Future

There are some strategies that we can review with you that have the potential to extend your retirement portfolio much further if you take out a reverse mortgage between the ages of 62 and 65 rather than waiting until, say, 72 to 75. If you need help determining how long your retirement portfolio will last, we would be glad to help you out with that as well. Of course, if you already have a financial adviser, you know the answer to this question already. At that point it’s a matter of putting us in touch with your adviser to discuss a strategy. Stop kicking the can down the road and contact us today!

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