People are literally retiring by the hundreds of thousands each year and will continue doing so for the next decade. That means these people will be looking everywhere for retirement funds. One of those places is the equity in their homes. That means reverse mortgages are going to be an attractive option for years to come.
One very important danger that people need to realize is that a reverse mortgage does not fully protect them from losing their home. Yes, there are laws that prevent a reverse mortgage from foreclosing on the home as long as the person lives in it. However, it does not protect them from owing property taxes (in many states) or from having to make homeowner insurance payments that are required by almost every loan. Those needing to draw on a reverse mortgage are typically in bad financial condition and are the most likely to have trouble keeping up with property taxes and homeowners insurance. Still, there are valid strategies that can be used regarding reverse mortgages.
People in a relatively healthy financial position may find this option appealing. They can set up a reverse mortgage as a line of credit. By far, most 401k and IRA type retirement accounts are invested in stocks or mutual funds. We've all seen how these can take big swings over the years. During the bad times, a reverse mortgage line of credit can be used instead of further drawing down a 401K or IRA that the stock market is already shrinking. According to a recent Etoro review, it can be a way of preserving capital so that it can again grow when the markets return to profitability.
A related way of using a reverse mortgage is drawing on it during your early years of retirement to allow a 401K or IRA to continue appreciating in value. This isn't without risk because no one knows what's going to happen with the stock markets in the future. During years of high earnings for 401Ks and IRAs it might even be practical to use part of those earnings to pay down a reverse mortgage to preserve your home equity.
Although the reverse mortgage has been around since the early 1960s, it is only in recent years that it has become a more popular financial tool. With the onslaught of baby boomer retirements, it is almost certain to both grow and go through significant changes. As it stands today, for most retirees, the most favorable practice appears to be setting it up as a line of credit that can be drawn on for unexpected expenses and to maximize returns on other investments.
If you are fortunate enough to have both home equity and a retirement account, the best advice is for you to have a long and serious discussion with a highly qualified financial planner about the best option that is most likely to allow you to maintain the lifestyle you are accustomed to.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.