Take Out a Reverse Mortgage to Plan Your Retirement
What role do reverse mortgages play in the bigger picture of retirement planning? Many baby boomers are struggling to choose how to use their assets properly as the number of people nearing retirement continues to rise. Finding out where you want to reside and how much cash you need to live comfortably are just two of the many factors to take into account while planning for retirement. Even while a reverse mortgage may not be the best solution for all, more financial experts are offering it as a choice to assist retirees age in place.
Reverse Mortgages and the Big Picture of Finance
Assessing your estimated costs of living and how they compare to your monthly income—which could be derived from a variety of sources, such as the profits from a reverse mortgage, assets, Social Security, investment earnings, or a pension—is a key component of retirement planning. Depending on your needs, a federally insured reverse mortgage that is taken out as a lump amount, monthly payments, a line of credit, or a mix of these may be able to help you better your financial situation.
By paying off the remaining balance of your existing mortgage, a lump-sum reverse mortgage may assist reduce the strain of monthly mortgage payments. Instead, opting for monthly reverse mortgage payments could help you supplement your income to pay for other bills like rent, utilities, and prescription drugs.
A third choice is a line of credit, which can be utilized with either the government’s normal reverse mortgage program or the new “Saver” product, which has reduced upfront costs and a lower maximum loan amount. Recent studies have revealed an advantage in retirement readiness for those who want to utilize the loans as part of a holistic strategy, regardless of the form of reverse mortgage.
Financial experts Sacks and Sacks recently conducted a study on reverse mortgages and financial planning, which was published in the Journal of Financial Planning. “The prevailing wisdom holds that home equity, drawn upon in the form of a reverse mortgage or similar product, should be utilized as a last resort, only if and when the [retirement] account is exhausted,” they wrote. This is a somewhat passive strategy. We demonstrate that turning the common thinking on its head significantly increases the likelihood of cash flow survival.
Will You Agree to Stay in Your Home?
A reverse mortgage can benefit seniors who want to remain in their homes for as long as possible, according to a AARP research that found that nearly 90% of those over 65 said they want to. You can update your kitchen, put in a new heating system, or fix your roof by using the equity in your property to finance these and other home improvements.
Additionally, ramps, stair-lifts, elevators, and bathrooms with adaptive tubs/showers and strategically placed grab bars can be made safer with the loan money. A rising trend is to receive health care at home, which may often be considerably more economical than moving into a designated retirement community. Reverse mortgage profits can also be used to supplement out-of-pocket expenses for in-home healthcare.
Supplemental Security Income and Medicare
Another factor to consider when considering a reverse mortgage and choosing the best payment option for you is your eligibility for specific means-tested benefit programs. Many reverse mortgage borrowers are at an age when they may qualify for benefits programs like Medicaid or Supplemental Security Income because you must be at least 62 years old to enroll for this sort of loan (SSI). Both are means-tested programs, which means your earnings and assets are taken into account when evaluating your eligibility.
Because you are only taking money out of the equity in your house, the proceeds of a reverse mortgage are not regarded as income. However, according to NeighborWorks, a national organization that offers reverse mortgage counseling to potential borrowers, if you have chosen to receive a lump-sum payment from your reverse mortgage and have those funds sitting in a bank account, those funds may be regarded as an asset and could affect your Medicaid eligibility and SSI. In order to make sure that a reverse mortgage won’t prevent you from collecting existing benefits, it’s crucial to speak with a tax professional.
Your Estate and Heirs
Understanding how a reverse mortgage would affect your children and estate is crucial before applying for one. You will eventually have to pay back the loan if you want to do so. The debt is due when you pass away or permanently vacate your residence. Frequently, the loan will be paid off by the sale of your house, which will fall to your heirs. Frequently, there is enough equity in your home left over so that your heirs might sell it, repay the mortgage, and pocket any remaining proceeds.
Your successors won’t be expected to pay more than the home’s value even if the loan total is higher than its value. Getting a reverse mortgage insured by the Federal Housing Administration has this as one of its main advantages. Some financial advisors advise putting the house in a revocable trust, which permits reverse mortgages but does not permit them with irrevocable trusts, or creating a transfer-on-death designation if you do want to leave your house to your children through a will (TOD).
Either of these alternatives enables heirs to save money on federal estate taxes and probate fees. If you put your house in a trust or have a TOD designation, your assets will immediately transfer to the trustee or beneficiary of your choice after your passing, avoiding the need for the probate procedure. Although they won’t be responsible for paying the charges of the probate court, your beneficiaries will still be expected to pay off your obligations and repay your reverse mortgage loan.
A Reverse Mortgage: How Does It Fit Into Your Nest Egg?
Retirement planning involves a variety of variables, and it’s crucial to understand how reverse mortgages may affect vital issues like geography, working capital, and your heirs. Please get in touch with us if you’re interested in learning more about how our reverse mortgage retirement plan can help you achieve your retirement goals. Contact us now.