With many experts and investors predicting actions continue to fall this year – ultimately precipitating a bear market – and inflation continuesmany people are looking for some sort of financial safety net to protect against what might happen.
And for some people, including savvy investors and financial planners, a reverse mortgage could be the answer.
What is a Reverse Mortgage?
A reverse mortgage is similar to a home equity loan, with a few key differences. In either case, the borrower is tapping into the equity in their home for cash now. With a home equity loan, the borrower pays off the lump sum loan through monthly mortgage payments.
With a reverse mortgage, however, the loan and interest only come due when the last owner of the house dies, sells the house, or leaves for more than a year.
Homeowners can tap into the equity in their home with a reverse mortgage in one of three ways:
According to the New York Times, some reverse mortgages pay interest on unused money in your line of credit.
Why are reverse mortgages a new “trend” in finance?
A reverse mortgage is traditionally seen as a last resort for homeowners over 62 who are in desperate need of retirement income and have no choice but to tap into the equity in their home. But today, with so much uncertainty surrounding other investments (including stocks and real estate), a reverse mortgage could help anyone looking to bolster their emergency reserves, according to a recent NYT article.
The NYT shares the story of Marjorie Fox, 75, a retired financial planner and widow who took out a reverse mortgage to bolster her $150,000 cash reserve. She made the move in case she needed the cash “when the stock market is down and it might be an inopportune time to sell assets.”
Fox also has several other forms of income, including an Individual Retirement Account, maturing bonds, Social Security benefits and a survivor benefit provided by her late husband’s pension. The reverse mortgage is only a backup plan — a plan she’s used so far for a few unforeseen financial expenses, according to the NYT.
Is a reverse mortgage right for you?
A reverse mortgage can help retirees avoid withdrawing from investment accounts early in retirement, a scenario that can create additional tax liabilities and tax deficits at a later date. Not only are you losing investment funds, but you are also losing any potential interest those funds might generate. If a portfolio is already down due to a bear market, it is even more difficult to rebound from early withdrawals.
Experts polled by the NYT recommended that retirees over 62 — at least those with a portfolio of $500,000 to $1.5 million worth of investments, not including their home — consider a reverse mortgage. If they see their wallet dwindling, they should consider taking out a reverse mortgage and living off those funds or creating a line of credit for emergency expenses.
According to said experts, the earlier you take out the mortgage, the more time you have to build up your line of credit as interest accrues.
These experts also recommended using a reverse mortgage as a “bridge” for retirement expenses, so you can delay applying for Social Security benefits until age 70. Some people use their 401(k) as a bridge to delay the withdrawal of Social Security benefits — but, again, you might not want to exploit investments in a bear market. A reverse mortgage could potentially bridge the budget gap.
However, the NYT also warned that a reverse mortgage is not always the right decision. It’s wise to speak with a financial planner familiar with retirement and reverse mortgages to make the best choice for you and your family.
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This article originally appeared on GOBankingRates.com: How a reverse mortgage could work for you now, not later