The Reverse Mortgage
Chances are high that when I mention the idea of a reverse mortgage to clients, I’ll be met with a very sour expression. I think this is because of the impression that these instruments are expensive and that you give up ownership of your home to use them.
Now, I am NO expert in these products, but for clients who have most of their net worth tied up in their homes, finding a way to use that equity to pay bills is a must.
Brainiacs who are way smarter than me have been modelling the use of a reverse mortgage in the overall retirement plan. The numbers show that using home equity for income, especially when retirement investments are down, can lengthen the time your nest egg will last.
What are the benefits?
Wade Pfau has been doing research on the use of reverse mortgages in retirement income plans says there are two big benefits:
- Using reverse mortgage early in retirement can reduce the stress of market volatility on the invested portfolio by allowing people to live off of their home equity rather than selling investments when values are down to pay bills.
- The second benefit is that opening a reverse mortgage now (especially with current low interest rates) can allow for the principal that you can borrow against to grow for a longer time.
Not everyone can get a reverse mortgage. You must be at least 62 years old, live in an “eligible” home, and there is a limit to how much debt can be against the home.
I’m not saying this is for everyone. Reverse mortgages are more expensive than conventional loans and they may tempt you to spend your home equity on dumb stuff instead of using it prudently. However, if you are feeling your retirement income is too tight and you meet the eligibility requirements, it could be worth investigating.
Check out more from Wade Pfau in this Forbes article. There is also a link to his website at the bottom of the piece.