As financing to buy homes
Better-off borrowers are harnessing reverse mortgage loans to get into a new house without cleaning out their financial portfolio or signing on for new mortgage payments.
Jill Gianola, CFP professional and owner of Gianola Financial Planning in Columbus, Ohio, worked with a couple who used this strategy to buy a $400,000 home. They put down $187,000 from the sale of their old house, and financed the remainder with a reverse mortgage loan.
Now, all they're paying on the home is property taxes, maintenance and insurance, Gianola says. And that was the appeal.
"They're not building equity, but they did preserve their nest egg longer," she says.
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As a credit line to hedge investments
Some financial planners are recommending that their wealthier clients open reverse mortgage equity lines of credit that can be tapped at any time throughout retirement.
They work like home equity lines of credit (HELOCs), with a couple of big differences:
- You make no payments.
- You owe interest only on the money you use.
- The unused portion of a reverse mortgage equity line grows at the same rate as the interest on the credit you use.
When financial markets take a dip, borrowers can withdraw money from the reverse mortgage equity line of credit, instead of selling off stocks or other assets. If you're not making what you should on your portfolio, you have an alternate source of cash.
The credit line can be a hedge against inflation in a "year when the stock market is not performing," says Gianola.
As a way to stay put in a pricey home
When retirees are house rich but have retirement accounts that look poor by comparison, a reverse mortgage loan can offer a way to resist the pressure to sell the home.
The luxury home "may be their only source of retirement funds," says Steve Cadoff, CFP professional and senior financial adviser at Altfest Personal Wealth Management. The loan would help the homeowner avoid having to trade down to a less expensive house.
But note that government-regulated reverse mortgage loans are capped at $636,150. A homeowner with a seven-digit property would either have to take a smaller loan amount or investigate a jumbo, or proprietary, reverse mortgage loan.
The rules and safeguards for proprietary reverse mortgages can be different, Cadoff cautions, so a borrower must be careful to understand all of the clauses, obligations and possible ramifications.
As a cushion when assets are not liquid
A reverse mortgage loan can make sense for a person whose home is appreciating nicely but who doesn't have many "liquid" assets that can be converted to cash more easily when the need arises. Stocks and bonds are examples of liquid assets.
“A reverse mortgage is a way to tap an illiquid asset when the client doesn't have more liquid assets,” says Cadoff.
He says while he normally doesn't like the idea of leveraging the home, a non-jumbo reverse mortgage loan insured by the Federal Housing Administration, or FHA, is a good option because you'll never owe more than the home is worth.
Wondering if you're eligible for a reverse mortgage loan? Read more about how to get one.