Beware of reverse mortgages, but don’t write them off

Reverse mortgages have earned a bad reputation because they are overpromoted, can be expensive and were often sold to people who shouldn’t have them.

But don’t rule them out automatically.

Under the right circumstances, a reverse mortgage can be a valid financial planning tool. In fact, when used correctly a reverse mortgage can help your retirement nest egg last considerably longer.

Reverse mortgages – technically called home equity conversion mortgages – now have lower costs and improved consumer protections thanks to Federal Housing Administration regulations instituted over the past few years.

A reverse mortgage converts home equity into cash. You receive money from the lender – or can have a line of credit that you draw upon when you choose – and generally don’t have to pay it back for as long as you live in your home. The loan is repaid when you die, sell your home or when the home is no longer your primary residence. And the proceeds of a reverse mortgage generally are tax-free.

So how can a reverse mortgage stretch your retirement savings? The key is to use the income stream or line of credit to supplement income from Social Security, 401k, IRA or other retirement accounts. If the stock market goes haywire, you can draw down your line of credit rather than selling stocks in a down market. Think of it as a kind of insurance for your retirement portfolio.

When would a reverse mortgage potentially be beneficial? Generally, if:

  • You want to maximize Social Security benefits by filing at age 70, but can’t afford to wait.
  • You are cash-poor but house rich.
  • You want to refinance your dream home during retirement.
  • Your family situation involves grown children who are financially comfortable but elders who are struggling to make ends meet.

A reverse mortgage should never be used as a last resort. Before you consider a reverse mortgage, contact us to ensure that you fully understand the consequences and explore all other options.

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