As individuals near retirement there may be a need for additional income in order to support their living expenses in retirement. On this blog we have discussed creating income streams in retirement with annuities, Social Security optimization, and withdrawal strategies in qualified accounts.
For some individuals these streams of income may not be enough. Another potential vehicle to assist with providing income in retirement is a reverse mortgage. Reverse mortgages are where an individual or couple uses the equity in their home to received monthly income payments. Generally, once the owners pass away or sell the home, the loan is paid off with the remaining equity in the home. There’s also a limit on the amount a homeowner can borrow.
The most popular form of a reverse mortgage is the home equity conversion mortgage (HECM) offered by the Department of Housing and Urban Development (HUD). To qualify, individuals must be 62 years of age or older, live in the home that qualifies for the loan and receive counseling from a HECM approved counselor. The counselor will educate the individual on the advantages and disadvantages of the reverse mortgage and whether or not it makes sense.
Should individuals decide that the HECM is right for them the still maintain ownership of the home. HECM loans are also non-recourse. In other words, an individual will never owe more than the value of the home when it’s sold – regardless if the home’s value declines.
From a retirement perspective, a reverse mortgage can increase the probability of not outliving your income at retirement. The income from the reverse mortgage can be used in conjunction with other income such as Social Security, pensions and qualified plan distributions. This is something we have helped clients with do determine if such a strategy is right for them.
For more information on reverse mortgages, the links below provide excellent information.
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten
https://www.consumer.ftc.gov/articles/0192-reverse-mortgages
Sterling Raskie, MSFS, CFP®, ChFC®
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