Since I explained the basics of how a reverse mortgage could work for you in a previous blog, I thought it would be beneficial to go into greater depth on the potential ways a Home Equity Conversion Mortgage (HECM) can be used within a retirement plan.
The HECM is Federal Housing Administration's (FHA) reverse mortgage program which enables you to withdraw some of the equity in your home. You choose how you want to withdraw your funds, whether in a fixed monthly amount or a line of credit or a combination of both.
In short, reverse mortgages are beneficial for the following purposes:
–Source of protection over the value of one’s home.
A recent Forbes article provided an organized chart that ordered reverse mortgages from uses that spend available credit more quickly to those that may never utilize the line of credit.
According to that chart, following are some of the more detailed uses of a reverse mortgage. Note: make sure to check with a financial expert before obtaining a reverse mortgage to make sure it’s the right choice for your situation.
Potential Reverse Mortgage Uses:
Portfolio/Debt Coordination for Retirement Spending
–Pay off an existing mortgage
–Transition from traditional mortgage
–Fund home renovations to allow for aging in same residence
–HECM for purchase of new retirement home
Portfolio/Debt Coordination for Housing
–Spend home equity first to leverage portfolio upside potential
–Coordinate HECM spending to mitigate sequence risk
–Use tenure payments to reduce portfolio withdrawals
Funding Source for Retirement Efficiency Improvements
–Tenure payments as annuity alternative
–Method for delaying Social Security payments
–Tax bracket management or pay taxes for Roth IRA conversions
–Long-term care insurance premiums
Preserve credit as insurance policy
–Support retirement spending after investment portfolio runs out
–Protective hedge for home value
–Provides contingency fund during times of extreme expenses (home health care, health expenses, divorce settlement, etc.)
Sources: Forbes.com; retirementresearcher.com