Editor’s note: This is the second installment of a two-part series on reverse mortgages.
A reverse mortgage might be a way to relieve a lot of cash flow stress for a retiree household. While it might not be right for everyone, there are some folks for whom it can feel like a lifesaver.
When we refer to a borrower or retiree here, it’s an individual who is over 62. Generally the same concepts will apply whether it’s one person or a married couple. For a few more details on how reverse mortgages work, see last week’s column.
Nathan Johnson, a specialist in reverse mortgage lending (www.todaysreverse mortgage.com), sees several types of borrowers that benefit from a reverse mortgage. A few of those circumstances are described here.
For a retiree who has a mortgage on their home, if the payment puts a squeeze on money that’s available for other living expenses, a reverse mortgage might relieve the pressure.
Depending on the homeowner’s age and the home’s appraised value, a reverse mortgage could pay off the existing mortgage, which would eliminate the house payment. There might even be enough equity to provide a line of credit for the borrower. The line of credit might be set up as monthly payments to the borrower, or provide the ability to draw money as needed.
Sometimes a home that has no mortgage is the biggest asset a retiree has. If that household could use a little more cash flow, it might benefit from a reverse mortgage. A lump sum could be invested for future use, or a line of credit could be set up to provide monthly cash flow or the ability to draw funds occasionally.
It’s common for retirees to downsize their homes and common for retirees to decide to move closer to family. In these situations, a reverse mortgage can be used to purchase a home.
How large the mortgage can be will depend on the age of the borrower and the appraised value of the home being purchased. Depending on these factors, there also might be a line of credit available on the home.
Nathan has seen the line of credit with a reverse mortgage be a huge help. While there are parameters around when it can be used, he counsels, “consider the line of credit as a way to conserve equity. It’s guaranteed, even if your house value goes down. And it’s tax free when you draw from it and grows tax free.”
If there is concern that the value of an investment portfolio has been hard hit by a market downturn, the reverse mortgage line of credit might give some relief.
Some reverse mortgage specialists advise that a homeowner over 62 get a reverse mortgage and use that instead of retirement assets. The strategy might not make sense for most people, as it could reduce some of the flexibility that a reverse mortgage gives in your larger financial situation.
Linda Leitz is a certified financial planner. She can be reached at firstname.lastname@example.org.