One strategy that some individuals rely upon to supplement their income or pay for healthcare expenses in retirement is a reverse mortgage. Reverse mortgages can be complicated and may not be for everyone, so it's important to consider your entire financial situation when deciding whether a reverse mortgage is a good option for you.
What is a Reverse Mortgage?
A reverse mortgage is a loan for seniors ages 62 and older in which the lender pays you. Homeowners may convert their home equity into cash income, in the form of a lump sum, fixed monthly payment, or line of credit and the income is usually tax-free. Generally, while you still live in your home, you don’t have to pay the money back, but you do need to keep current on all property tax and homeowner insurance payments. When you sell your home, move out, or die, you, your spouse, or your estate would repay the loan. And that may mean selling the home in order to repay the loan.
If you would like to learn more about reverse mortgages, here are some articles on the topic.
How does a Reverse Mortgage function in the Planner?
If you indicate that you have a reverse mortgage on your primary residence, then the planner assumes you won't have any home equity in the future (which is most often not the case, but it is more conservative when it comes to planning).
If you select reverse mortgage as a future change to primary residence in the Planner, you are indicating you want to model tapping your home equity via a reverse mortgage line of credit.
The age field for reverse mortgage is the earliest age that the reverse mortgage can take effect and can not be before 62. The Planner models obtaining a reverse mortgage at your age selection as a line of credit that is drawn upon after exhausting all after-tax savings and before drawing from retirement savings. The reverse mortgage will “kick in” when there is insufficient income and savings to cover expenses, also referred to as a shortfall or deficit. The Planner does not model income streams or lump sum deposits from reverse mortgages.
The modeling of the reverse mortgage income will depend upon the level of funding in your plan.
In the example below, you can see the future change to primary residence reverse mortgage selection at age 65 for a plan that is not fully funded.
The income from the reverse mortgage is represented on your Estimated Income chart.
In the example below, you can see the future change to primary residence reverse mortgage selection at age 65, for a plan that is fully funded.
If you wish to model using the reverse mortgage to fund long term care expenses, you would time the shortfall, or deficit, in your plan with your long term care needs.