I love lists -- doesn't everybody? Well, here are the five best reasons to get a reverse mortgage right now.
And, yes, we're all worried about our retirement. Some of us have taken steps for years to prepare ourselves by setting aside money in our 401(k) and other investments. Some of us are still behind where we want to be and are anxious about what it means for our security and lifestyle once we quit working. Many will keep working to make up for their lack of retirement savings and opt to wait and take their Social Security benefits and let them grow. But many of us have an ace in the hole to turn to help fill in the gaps of our retirement and help us envision the dreams that we have once we stop working: A reverse mortgage.
With a reverse mortgage, homeowners 62 and older receive a loan backed by the equity in their homes. The lender isn't repaid until the person is no longer living in the home or dies.
Homeowners can get a lump sum in the beginning and draw out more later. They can also have a line of credit from which to draw as needed.
The reason to pursue a reverse mortgage is for the home's equity, since there's no longer any more asset-based lending ever since the mortgage crash and change in rules. Home equity loans are a product of the past. Today, they're income-based loans and as our income goes down, it becomes tougher to qualify for loans. You don't have the ability to access all that equity you have saved over the years, which was the whole point of buying the house -- that ability to access the equity in an emergency in your retirement. Those days are essentially over.
Before turning 62, there's no longer the easy ability to draw from the equity in your house other than selling it. That's why reverse mortgages are becoming more critical in retirement planning because it allows you to maintain your home and lifestyle, and make money from it.
There are plenty of reasons to secure a reverse mortgage. People can use them to buy a second home. Some may choose to retire early. Others may want to start a business. They give some people a chance to travel or do their bucket lists before they get too old. For many others, it's the money in the bank/peace of mind option that's attractive to them.
Below are the five definitive reasons to get a reverse mortgage right now.
1. Second Home
Many are taking the equity from a reverse mortgage to buy a second home, either one they vacation in or rent out and bring in $2,000 to $3,000 a month that they add to their retirement income.
In one example, a couple with no retirement savings and no income stream selling their home for about $600,000, took half that amount and invested it and other half to buy a four plex. They would use a reverse mortgage to pay for the remainder of the four plex. They had funds to fix up one of the units for themselves as part of a strategy to downsize. Their other three units were rented out to generate income that would supplement their Social Security benefits. That's an example of a couple completely changing their life by using a reverse mortgage.
It doesn't have to be used for downsizing.
It could be that home next to the golf course or that condo in Hawaii that can be also used for rental income. If you live in New York City, doesn't the sound of a place in Florida to escape the harsh winter sound appealing?
When you can use cash from the proceeds of the reverse mortgage to pay for the second home, you don't have to worry about mortgage payments any longer and if you want, you can draw income from it when you're not in Florida. That property will even appreciate and give you more to benefit from in the future.
It doesn't even have to be a second home or a condo. Some may choose to spend it on a boat or whatever else their retirement dream is. Simply, a reverse mortgage is a vehicle to help you realize your dreams if you haven't properly planned for it.
2. Retire Early
When we turn 62 and have a several thousand dollar a month mortgage payment, we can opt for a reverse mortgage and take that mortgage payment we've been making and put into a retirement account and take proceeds from the reverse mortgage to pay the bills. That allows the 401(k) and other investments to keep growing for several years. You're better off leveraging the equity in your home and keeping the retirement savings in place because that's earning more money.
Many older Americans have $100,000 and $125,000 in retirement income and that's not enough to live in once they stop working. Eliminating your mortgage payment at 62 -- even if you owed another 10 to 15 years on your home -- is going to jumpstart any additional retirement savings. If you work until you're 70 (as many people are choosing to do these days), that results in the best of both worlds. You get to keep your house, eliminate your mortgage payment and take that money to build your retirement savings that can last 10 to 20 years after you stop working. If you have plenty in savings, you can stop working 10 years earlier because you planned.
You're a step ahead of others who lost money because of the stock market crash and didn't plan for retirement.
3. New Career
Anybody that's tried to obtain a regular business loan from a bank knows how difficult it has been to get one since the Great Recession. The same is true for many opting for Small Business Administration loans -- even for people who have a business with cash flow.
It's hard to start a business unless you have a lot of capital in the bank. If someone opts for a reverse mortgage and takes out $150,000 to $200,000 in equity, they can parlay that into buying or starting their own business.
Not everyone has the aptitude to start a business, but if you do, it's a smart way to take that small amount of money and turn into a long-term income stream and asset that eventually you can sell. That $150,000 over 10 years can be turned into more than $1 million in income for the savvy business owner.
By using the reverse mortgage as a business loan to yourself, you don't have to pay that loan back, so your cost of capital is lower than the competition down the street. Potentially, you can be cheaper than your competition.
Again, it's not an option for everybody because a lot of people go out of business.
But for those who want to proceed, they know the biggest challenge is coming up with that initial capital. In the beginning, the need for cash is greater than the cash flow. When most business are started out of pocket, that's a huge advantage.
Travel of any kind isn't an option for people who haven't planned for retirement. Taking care of daily expenses and needs is what's most important. But for some older Americans who have enough money stashed away for their retirement needs, they may choose a reverse mortgage to travel to places they've never been or address other wants on their bucket list.
Many people, when they're too old to travel or otherwise hampered by poor health, often look fondly about the trips they took with their grandchildren, spouses and friends. Those are some of the greatest memories of their lives.
Whether it's a trip around the world or a jaunt to some European or Asian capitals, many people want to go but don't want to touch their investment income for that purpose because it's expensive to do so. The equity in your home isn't earning a return and it's a perfect place to tap for beautiful memories.
5. Peace of mind
Peace of mind is one universal pursuit most of us strive to achieve every day. The ability to not have to worry and have contingencies in place. The reverse mortgage is such a realistic vehicle for a lot of people.
It's a line of credit that grows over time and is always available to you when you need it. You may not need it, but it's there if something happens.
Let's say we get Alzheimer's or have a stroke and need assisted living. That's the worst time in your life to worry about how you're able to pay for it. You have so much going on, and everybody is stressed. You don't want to make financial decision in a crisis.
The reverse mortgage is a line of credit you can leverage when other unexpected financial hardships occur. It may only be a car engine blowing up or is damaged in some way and you need a new car.
It's very inexpensive money from which to draw because there's no monthly payment being paid and none lost to the stock market by not keeping it invested. No one wants to sell assets at a low point when you bought it high.
The peace of mind could simply be downsizing or paying for many years in an assisted living facility. Many people aren't prepared for elderly care.
Leverage is why we bought the house, especially if some of us didn't plan for retirement, as we should have done. If you're not leveraging it, that equity has no value.
Not everyone understands what a reverse mortgage actually is and there is a lot of misinformation out there, even in otherwise reputable and reliable media sources. Some think the name means you have to give your house back. You don't. Maybe the Australian term of an opposite mortgage explains it better.
It's your house in which you can enjoy the appreciation it has built over the years. It's only a mortgage that has the most flexible repayment terms there are. You can keep on making your mortgage payments for now, but you know if you lose your job, your health or you have to stop making payments, you aren't in danger of going into foreclosure.
Yes, a reverse mortgage gives you peace of mind.
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