Forbes: Turn home equity into additional savings with a reverse mortgage
The ‘Mortgage Professor’ offers his thoughts about incorporating home equity into a retirement plan, and why including a reverse mortgage can significantly increase the funds available.
A reverse mortgage, which can be used to convert equity from your home into cash, can help you factor in the growth of your home equity when planning for retirement. In a Forbes column, Jack Guttentag (aka the “Mortgage Prof”) offers a wider range of retirement spending strategies.
“Consumers who have a significant portion of their wealth in their home should aim to supplement their periodic savings by increasing their home equity during the period before retirement,” Guttentag writes. “Unless the consumer wants to leave the home equity in their estate, that equity can be converted into a reverse mortgage credit line to supplement spendable funds during retirement […].”
Guttentag states that although there are elements of a reverse loan that are out of the borrower’s control, especially those that affect market conditions that determine a home’s value, there is one way that they can be changed.
He explains that although reverse mortgages are based on home equity, which is affected by market trends and over which retirees don’t have control, homeowners have the right to make improvements and maintain their homes to maximize that equity asset.
Guttentag states that reverse mortgage borrowers must also be active participants if they want to include such a loan product in a retirement plan. That means increasing equity withdrawals with the reverse mortgage line of credit in down stock markets and decreasing when the added income is not needed.
He explains that the key to making the reverse loan an effective part of a retirement plan is to gradually draw on the credit line in the plan. “Homeowners who take the maximum amount from their reverse mortgage in the very beginning will impede their retirement,” he says. This is because the initial line of credit with a reverse mortgage has no cost to the homeowner until it is used, then the amount drawn is added to the outstanding balance. The unused portion grows at a guaranteed growth rate established at the time of inspection. That means the longer it is not used, the more funds will be available when needed. It can also be repaid and reused as necessary.
Read more about the Reverse Mortgage Line of credit on our blog.
Financial experts encourage discipline in the best use of reverse mortgage loans’ proceeds. RMD interviewed Steve Vernon, a Stanford Center on Longevity Consulting Research Fellow, to discuss his attitude towards reverse mortgages and the ways that certain borrowers have misused their loan proceeds.
He explained that he has seen his neighbors get reverse mortgages and then go on cruises with the money. “So, I think there are a lot of risks in the reverse mortgage market for people that don’t have the discipline and the knowledge to use them. I hope originators would be able to explain these dangers.” Read the full article in the Forbes column.
Richard Woodward explains that as a Certified Reverse Mortgage Specialist, he has always abdicated for our seniors and helped show them the advantages of the reverse mortgage line of credit. He originates a great many of these types of loans and the first thing he tells them is to take the smallest possible initial distribution from your reverse mortgage and let the remaining amount stay in your line of credit. This acts as a safety net and a hedge against inflation and downturns in the stock market which can dramatically affect one’s assets. Use the line of credit only when necessary and strategically. If your brokerage account is seeing large declines, stop drawing funds out for day-to-day expenses and instead, draw funds from your reverse mortgage line of credit. This allows our brokerage account to recover more quickly when the market gains and the line of credit helps satisfy your cash flow problem.
Reverse Mortgages as a strategic part of your retirement plan.
If you would like to learn more about reverse mortgages use the search bar at the top of the page to search for more articles or contact Richard Woodward for a free and no obligation review of your mortgage needs.
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