When you retire, would you rather have $500K of equity and 0 cash in the bank?  Or would you rather have $500K cash in the bank and 0 equity?  I personally would rather have $500K cash in the bank and no equity. Let’s face it, cash is usable and equity is not.  You simply cannot take your equity to the supermarket and buy groceries or put gas in your car with equity, but you certainly can with cash.    

Here is a retirement statistic for you to ponder…over 10 million homeowners in the U.S. age 65 and older are still making mortgage payments. Now consider this, more than half of all seniors in the U.S. are in jeopardy of running out of money before they die. (Source: Center Of Retirement Research At Boston College).  However, many of them can avoid this risk by utilizing one of their most secure and dependable assets, their home equity.  

Let me ask you another question…are you prepared financially for an unplanned event?  Many of my clients tell me that they are “ok” financially and have enough to cover their current expenses. However, they are not prepared for the possibilities…like if one were to lose their spouse and therefore lose around 40% of their household income.  Or get a terminal illness and spend half of their savings on medical care.  Or get a divorce and lose half of everything they own (divorce rates of couples age 55 and over has doubled in recent years).  So, I ask you, do you wait for a rainy day to go out and buy an umbrella or do you buy an umbrella now in case it rains someday in the future?  It seems silly to wait for the rain to come then come up with a plan right?  

This is where a reverse mortgage can be utilized as an umbrella…to protect yourself, to plan and to be prepared in case life happens.  A reverse mortgage is a loan that is available for homeowners aged 62 or older (options actually begin at age 55).  This is an incredible option for seniors to access a portion of their home’s equity that is sitting static and unusable. The proceeds received from a reverse mortgage can be used for anything, whether it be to pay off a regular mortgage that requires monthly payments, cover living expenses, consolidate debt, medical expenses, making home improvements, vacations, gifting, or even legacy planning. Additionally, because the proceeds from the reverse mortgage are considered borrowed funds, there are no income taxes charged on the proceeds.  You can even use a reverse mortgage to purchase a new primary residence.

Unlike a traditional mortgage or home equity line of credit, a reverse mortgage does not require any monthly payments (the homeowner must still pay for homeowner’s insurance, property taxes, home maintenance and HOA dues).  The interest charged on the loan is simply added to the loan balance and gets paid back when the loan is paid off.  The loan does not need to be paid off until the last borrower permanently leaves the home (either passes away or no longer lives in the home as their primary residence) or decides to sell the home.  So, in many cases if the homeowner lives in the home for the rest of their life, it does not require repayment until the last living borrower permanently leaves the home or loan terms are not met.

There are quite a few misconceptions with reverse mortgages and there have been many horror stories in the past unfortunately.   First, when you do a reverse mortgage, you still own your house, you still hold title to your house and you can still pass your house onto your heirs through your estate plan.  Many people believe that when you do a reverse mortgage, the bank now owns your home…that is simply not true.  Additionally, many people think that you must own your home “free and clear” meaning that you don’t have a mortgage on your home.  However, that is also not true.  A reverse mortgage can be utilized to pay off a traditional mortgage ultimately eliminating monthly mortgage payments (except for taxes, insurance, and maintenance).  As a matter of fact, most reverse mortgages that are done today are done to pay off a traditional mortgage.  

Traditional financial planning tells you that you should not have a mortgage payment when you enter retirement.  However, due to inflation, rising health care costs, fewer pension plans, lower savings rates, and higher housing costs, many Americans are retiring today with a mortgage payment.  Therefore, a reverse mortgage is a great option for folks looking to retire but “cannot afford to retire”.  In my opinion, one of the most dangerous and costly things that someone in retirement can do is to use taxable funds (like from an IRA, 401K or managed account) and make a mortgage payment.  This is simply using liquid funds, paying taxes (and penalties in certain cases) to pay down a mortgage which ultimately creates more equity…which is once again illiquid.  So why not save your liquid funds, pay less in taxes and penalties so those assets could last you longer and improve your overall financial longevity?  

There has also been a paradigm shift with reverse mortgages over the last 6 years.  Historically a reverse mortgage has been considered “a loan of last resort”.  Meaning, once you exhaust all your options, then you should get a reverse mortgage. However, there has been a shift in thinking due to research from several folks like Dr. Wade Pfau Ph. D, CFA, Jamie Hopkins MBA, CFP, CLU, RICP and Barry Sacks J.D., Ph.D,  which has proven that if you use a reverse mortgage  earlier in retirement as a coordinated strategy with your other assets, you will have a higher probability of achieving your financial goals.  What does that ultimately mean…it means that by utilizing a reverse mortgage and eliminating a mortgage payment (except taxes, insurance, and maintenance), and by using a portion of your home equity to preserve and protect your other assets, your other assets will last you longer and you will improve your cash flow survival rate.

In times of uncertainty, a reverse mortgage can provide safe, secure cash (free of income taxes) to homeowners.  Since COVID, we have seen extremely volatile returns in the stock market and many seniors are panicking as they have watched their retirement accounts lose double digit returns last year (2022).  The worst thing that anyone could have done at that time was to pull money from their account as this would have simply locked in those market losses.  With this being said, many people in retirement rely on their retirement accounts to offset their income or cover their basic living expenses and they are therefore at risk whenever the markets fluctuate (if they need these funds).  However, Dr. Wade Pfau’s research has illustrated that a reverse mortgage can be used to avoid locking in these losses which can be extremely detrimental to the overall retirement plan*.  Therefore, many homeowners are now utilizing a reverse mortgage as a hedge against the market in order to ensure their assets last as long as possible, reduce tax liabilities, and ultimately leave a larger legacy to their heirs*.  

In conclusion, a reverse mortgage should be considered by any homeowner 62 years of age or older, with a significant amount of equity in their home.  The reverse mortgage has so much flexibility and there are several different ways to access the equity that it makes sense to connect with a reverse mortgage planner to review the options that are best for you.