No one ever said that life is easy, fair, or even that it comes cheap. In fact, the cost of living has been incrementally increasing over the years making it that much harder for individuals to afford even the basic necessities.
But if you are a homeowner where a lot of your accumulated wealth over the years has gone into increasing your home equity, a reverse mortgage just might be one of the best solutions to life’s problems.
While many financial experts don’t like to suggest using reverse mortgage as a credible financial tool, the truth is that many homeowners have found obtaining a reverse mortgage to be a useful way to fund retirement, pay medical bills, and improve their quality of life.
If you have ever considered getting a reverse mortgage but have been unsure if the benefits outweigh the drawbacks, here are 5 reasons why getting a reverse mortgage is a good idea.
Enjoy Your Retirement
Whether you are relocating to somewhere tropical or simply relaxing out on your back porch, retirement can still be an expensive pill to swallow.
Life doesn’t just stop because you retire, but many people do experience a reduction in income. As a result, many homeowners find it difficult to balance their budget when transitioning to a fixed income.
Research also shows that nearly 35% of Americans have no money set aside for retirement1. If you haven’t properly saved for retirement or if you cash it tied up in your home, a reverse mortgage might be the solution for you.
A reverse mortgage can help you fund your retirement in style by providing you a supplemental stream of income to help you balance your budget and pay your monthly expenses.
The IRS has also determined that funds received from a reverse mortgage are not taxable, because they are considered loan proceeds rather than income2.
Get Paid Your Way
Reverse mortgages can be set up in a variety of different ways, meaning they can be extremely flexible. This also means you can set up the payments to best suit your needs.
For example, if you are someone who knows they will blow through a lump sum of money pretty quickly, you may want to consider choosing monthly advances.
On the other hand, if a portion of the funds has already been earmarked to consolidate debt or complete home improvements, taking a lump sum may be beneficial.
The bottom line is that a reverse mortgage can be customized to help you achieve your financial goals. Furthermore, the funds can be used for practically anything. There are no restrictions on how you use the funds.
Contrary to popular belief, your home does not need to be free and clear to qualify for a new reverse mortgage. Many homeowners elect to obtain a reverse mortgage as a way to pay off an existing forward mortgage.
By paying off your existing home loan, you free up money in your budget because you no longer have a monthly housing payment. But a reverse mortgage is not just limited to paying off your current mortgage.
Paying off other debt including high interest credit cards, personal loans, and installment loans can also help reduce your monthly expenses and make living much more affordable.
Pay Medical Bills
Things in life can come up unexpectedly, throwing a wrench into your overarching financial plan. Specifically, healthcare related expenses can really eat into your savings and impact your household budget.
According to the American Medical Association, health spending in the United States grew by over 4% in 2019 which has been about the trend for the last few consecutive years3. As medical costs increase, it can make it harder to pay medical costs out of pocket.
Many borrowers that suffer from major or ongoing medical expenses choose to pay off those balances by using a reverse mortgage. Not only can you eliminate your balances, but a reverse mortgage will actually provide you with income to help combat future costs.
Protection Against Market Fluctuations
It may seem a bit absurd, but a reverse mortgage can be a blessing if real estate markets experience a correction or downturn. That is because reverse mortgages are a type of non-recourse financing4.
Unlike a traditional mortgage where your payment goes down over time, with a reverse mortgage your balance grows over time. This means that depending on how the market is doing, it’s plausible that your loan balance could exceed what your home is truly worth.
In this circumstance, a creditor cannot come after your personal assets (or your heirs’ assets) to repay the debt. This can provide you with peace of mind knowing you are okay despite what the market may or may not do.
1 Backman, M. (2020, February 19). You’ll Be Shocked by How Many Americans Have No Retirement Savings at All. Retrieved May 11, 2021, from https://www.fool.com/retirement/2020/02/19/youll-be-shocked-by-how-many-americans-have-no-ret.aspx#:~:text=Unfortunately, a large number of,survey released in January 2020.
2 Internal Revenue Service. (2021, January 04). Reverse Mortgages. Retrieved May 11, 2021, from https://www.irs.gov/faqs/other/for-senior-taxpayers/for-senior-taxpayers#:~:text=No, reverse mortgage payments aren,to live in your home.
3 American Medical Association. (n.d.). Trends in health care spending. Retrieved May 11, 2021, from https://www.ama-assn.org/about/research/trends-health-care-spending
4 Miller, P. G. (2021, February 03). Reverse Mortgage Pros And Cons. Retrieved May 11, 2021, from https://www.bankrate.com/mortgages/reverse-mortgage-pros-and-cons/