Planning for retirement is essential. What if you are behind in your retirement savings? According to a January 2024 article in The Motley Fool, some suggestions include working longer, saving aggressively, investing more effectively, relocating to a less costly living situation, and looking into a reverse mortgage.
A reverse mortgage can provide an additional income stream without selling your home if you are 62 or older. This article discusses the benefits and drawbacks to help you make informed decisions about your financial future.
Consider the scenario of a retired couple, Jonathan and Muriel, who have lived in their home for several decades. They find themselves in good health, but their retirement savings are insufficient to cover unexpected medical expenses, and they want to enhance their quality of life without downsizing or sacrificing their homeownership.
In this situation, a reverse mortgage could be a highly beneficial option for Jonathan and Muriel. Here’s how:
- Supplemental Income for Medical Expenses: Jonathan and Muriel face unforeseen medical expenses due to health issues. With a reverse mortgage, they can access a portion of their home equity to cover these expenses, ensuring they receive medical care without compromising their financial well-being.
- Maintaining Independence and Lifestyle: Jonathan and Muriel have a solid emotional attachment to their home and community. They want to age in place and maintain their independence for as long as possible. A reverse mortgage is one way to cover their increased costs for health care and allows them to stay in their home.
- No Monthly Repayments: Given their fixed income, Jonathan and Muriel may struggle to manage monthly mortgage payments. A reverse mortgage relieves them of this burden, as repayment is deferred until they sell the home, move out, or pass away.
- Flexible Payment Options: Jonathan and Muriel can receive the funds as monthly payments to have funds for their increased health care needs. They can also consider a lump sum or a line of credit.
- Preserving Other Retirement Assets: Instead of tapping into their savings or investments, Jonathan and Muriel can use the reverse mortgage to access the equity in their home, preserving other retirement assets for potential market fluctuations or unexpected financial challenges.
While this example illustrates a situation where a reverse mortgage is a good idea, you should obtain advice from a knowledgeable financial advisor. Here are some considerations and drawbacks regarding a reverse mortgage:
- Accruing Interest: While borrowers are not making monthly payments, interest on the reverse mortgage continues to accrue. This means that the total amount owed can increase over time, potentially reducing the inheritance for heirs.
- Impact on Heirs: The loan must be paid when you die or move out of the home. If the cost of the reverse mortgage and paying for care in the house is less than or equal to the costs of an assisted living facility, this would not affect the overall inheritance. Your heirs might need to sell the home, but they would not be personally responsible for the debt exceeding the home value.
- Costs and Fees: Reverse mortgages come with upfront costs and fees, including origination fees, closing costs, and mortgage insurance premiums. Seniors must understand these expenses and factor them into their decision-making process.
- Home Equity Depletion: Over time, a reverse mortgage can deplete the home equity, potentially limiting the financial resources available for other purposes or unexpected expenses.
A reverse mortgage may be suitable for you or your loved one. If you plan to set roots and stay in your current home indefinitely, a reverse mortgage might be something to consider. But, if you’re considering moving in the next few years, you should explore other borrowing options that could save you substantial costs.
We suggest you obtain good financial advice, which means getting answers from someone who does not sell reverse mortgages. We also recommend you use a financial snapshot before making this decision. A financial snapshot shows all your income, where your money is going, what you own, and what you owe. Ideally, you integrate your financial plan with your estate and long-term care plan. Then, you can have a comprehensive and tailored plan that addresses immediate and future financial needs, providing a roadmap for financial success throughout the different stages of life.
The team at Boyer Law Group is ready to help you create an estate and long-term care plan.