Retirement Account? Check! Social Security Payments? Check! Pension? Check! Investment Portfolio? Check! Savings Account? Check! Real Estate? Check! Credit card? Check! Reverse Mortgage?
I would like to follow up on my post last week (“Financial Planners Don’t Understand Reverse Mortgages“) and ponder an interesting question: Does debt, specifically in the form of a reverse mortgage, deserve a place in your retirement planning? When a homeowner makes the transition into retirement, is it worth pondering a reverse mortgage as part of an overall retirement “strategy.” If so, under what circumstances, if any, would a reverse mortgage be justified?
For the record, I’m not a financial planner, and I’m about to offer specific tips on investing one’s retirement savings.That is something only a real financial planner or investment adviser can do. Still, it’s reasonable to say that as one ages, one’s financial planning should aim to become less risky and more conservative. That means moving from stocks to bonds to cash, moving from illiquid investments into liquid assets that can be drawn from immediately if necessary. That also usually means eliminating debt.
In this context, reverse mortgages would appear to have a contradictory role. On the one hand, they are the epitome of liquidity; after being issued, they can be drawn from until the lending limit is breached. On the other hand, it represents debt, and most financial planners advise retiring borrowers to eliminate debt as they move into retirement. At the same time, a reverse mortgage is different from conventional debt since it is repaid through the sale of the property and not in periodic installments. In addition, if used to phase out a conventional mortgage, it can have the effect of eliminating debt in the practical sense. (To be fair, in the actual sense, one form of debt is actually being swapped for another).
It’s fair to say that for those that own their homes outright, have stable sources of income (from social security, pension, etc., if not from actual work), and healthy personal balance sheets (assets well exceed liabilities), a reverse mortgage isn’t necessary. Sure, it would be nice to monetize one’s home and have access to a line of credit, but a price is paid (in the form of origination fees, insurance premiums and eventually, interest payments) for this luxury. Since reverse mortgages can be usually be processed quickly – they don’t require the credit checks and documentation of conventional mortgages – it’s probably better to wait until your financial position and lifestyle preferences actually necessitate obtaining one.
For those of you that don’t own you homes outright and lack the wherewithal to repay their primary mortgages, you could consider obtaining a reverse mortgage. This would serve to eliminate debt (aka risk) and to free up cash/income that you had otherwise used to make mortgage payments. For those that own their homes (and don’t want to move!) but have weak financial positions, a reverse mortgage would buttress your monthly income, if taken in installments.
For all borrowers, the proceeds from a reverse mortgage should only be used for home, living, healthcare, and related expenses. They shouldn’t be obtained with the intention of investing the proceeds in other financial products, such as stocks, bonds, annuities, etc, and to supplement other, existing sources of income.
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