One of the numerous benefits that a reverse mortgage offer is the flexibility in how homeowners can access their home’s equity, without having to sell their home and without incurring a monthly mortgage payment of principal and interest. The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM) which allows homeowners three options to access their available equity. Let me breakdown these options.
The first option to access equity is what is called a lump sum. A lump sum is when a homeowner takes out a sum of cash to either pay off an existing mortgage, or to pay off other liabilities. Alternatively, a homeowner can simply take out a lump sum and use the cash for anything they wish. In some cases, homeowners have used the cash to purchase a new vehicle, or a vacation home or they have given it to family members as a gift/ inheritance. I have also had clients use a lump sum to give funds to charity in lieu of using other assets like retirement funds which have large tax consequences.
The second option in which you can access your equity is by setting up a monthly payment plan. The monthly payment plan creates a consistent stream of cash flow every single month that is automatically deposited into your personal checking account. We do not call this income because there are no income taxes assessed on the funds. However, this is like a monthly income in the sense that it is guaranteed and can be used for supplemental cash flow, or to replace income that might have been lost due to retirement or from losing a spouse. Alternatively, this strategy can be used to create cash flow while waiting to receive Social Security benefits.
The third option to access equity is called a Line of Credit (LOC). This is a revolving line of credit, which means you can take money out when you need it with the flexibility of repaying it at any time you wish. However, there is no requirement to pay it back monthly like a traditional home equity line of credit. Additionally, the available funds in a Reverse Mortgage LOC increase or grow over time which allows homeowners to access more and more of their equity over time. The LOC can be set up for immediate needs or for long-term needs (or even unknown needs) and can once again be used for anything, at any time. The LOC is a great strategy to utilize for future expenses since the long-term growth of the LOC will provide access to additional equity in the future. One strategy is to set up the LOC sooner rather than later to allow the available funds to grow throughout your retirement years.
Lastly, homeowners can utilize a combination of any of these three options. Therefore, a homeowner can get a lump sum of cash, create a monthly payment plan, and establish a growing line of credit all at the same time. A Home Equity Conversion Mortgage can ultimately be utilized in numerous ways to help achieve different needs and goals. This is certainly not a one-size-fits-all financial tool. However, this is a very flexible product that can once again be utilized in countless ways to help solve various challenges and create cash flow in retirement.
