When planning for retirement, it’s important to carefully consider all of the options that are available to fund your life after work. For most retirees, their most valuable asset is their home. A reverse mortgage is a lesser-known financial strategy that few Americans know exists. In fact, less than 2% of people who are eligible for a reverse mortgage actually take advantage of it.

In the right situation, leveraging a reverse mortgage can make a significant difference in the quality of your retirement financials. It’s important to understand how reverse mortgages work and the pros and cons of using this strategy.

How Does a Reverse Mortgage Work?

With a reverse mortgage, a lender gives the homeowner a portion of their home’s equity. To qualify for a reverse mortgage, also referred to as a Home Equity Conversion Mortgage (or HECM), the borrower must be at least 62 years of age and use the home as a primary residence

This loan is typically paid to the homeowner through a lump sum, monthly payments, or access to a line of credit. The total amount is determined by the homeowner’s age, value of the home, and current interest rates. Most people can expect to receive between 60% to 70% of available equity.

The best part about a reverse mortgage is that the homeowner isn’t required to make any payments on the loan until they sell the home, move out permanently, or pass away. When one of these events occurs, the loan and any interest accrued must be repaid either through the sale of the home or with other assets. If the sale of the home doesn’t cover the entire amount owed, the lender is required to absorb the loss. On the other hand, if the home is sold for more than is owed on the loan, the homeowner (or heirs in the event of death) will be entitled to the difference.

How Wealthy Families Leverage Reverse Mortgages

It’s important to note that a reverse mortgage isn’t just for people who have tight financials heading into retirement. Even affluent homeowners regularly leverage reverse mortgages to build their wealth. Understanding their strategy can help you figure out ways to take advantage of reverse mortgages yourself.

• Reliable Cash Flow – Wealthy families often rely on a variety of investments to fund their lifestyles such as the stock market. A reverse mortgage can help provide a steady stream of cash when the market is down to avoid tapping into assets that have fallen in value.
• Tax Savings – Reverse mortgages are essentially tax-free since the US government doesn’t recognize loans as taxable income.
• Compound Growth – Wealthy individuals can use the cash from a reverse mortgage to invest in other assets like rental properties, businesses, and other investments that have a higher growth rate than residential real estate.

At Market Financial, we want to help you get the most out of the assets that you and your family worked hard to build. Let us work with your CPA or Financial Advisor to evaluate your financial situation and determine if a reverse mortgage is right for you.