A reverse mortgage can be an important part of retirement planning for wealthy retirees that have a substantial amount of home equity.

It is a financial product that allows you to access part of the equity in your home while you are still living in it.  This is equity that is “dormant”, not generating additional income or improving one’s quality of life. 

You can use the money for virtually anything… investments, enhancing your quality of life, a reserve fund for  potential long-term care, supplementing retirement income, etc.

Benefits of a Reverse Mortgage:
  • Protection from Market Volatility: A reverse mortgage can act as a hedge against market downturns since the loan balance is not affected by the home value fluctuations. The borrower can also use the reverse mortgage to delay claiming Social Security benefits, which can increase their monthly payments by 8% for each year they defer.
  • Tax Advantages: Most distributions from a reverse mortgage are tax-free, since they are considered loan advances and not income. This can lower the borrower’s taxable income and potentially increase their eligibility for certain tax deductions or credits.
  • Flexibility: A reverse mortgage can offer different options for receiving the loan proceeds, such as a lump sum, monthly payments, a line of credit, or any combination thereof. The borrower can choose the option that best suits their needs and goals.
  • Supplemental Income: Avoid tapping into other assets – a reverse mortgage can pay of an existing mortgage and provide a source of income that can supplement other retirement income, such as pensions, Social Security, or investments. 
  • Increased Cash Flow: A reverse mortgage does not require the borrower to make any monthly principal or interest payments, so there is no negative impact on monthly cashflow.  Unlike a traditional mortgage or a home equity line of credit (HELOC). The loan balance is repaid when the borrower sells the home, moves out, or passes away.
  • Credit Line Growth: A reverse mortgage line of credit has a unique feature that allows it to grow over time, regardless of the home value or interest rate changes. This means that the borrower can access more funds in the future, as long as they have not exhausted the line of credit.
Basic qualifications include:
  • In most states the youngest borrower on the title must be at least age 55
  • You must have at least 50% equity in your home
  • The home is your primary residence (i.e. vacation homes and rental properties are not eligible)

These benefits are why many financial planners recommend reverse mortgages as part of retirement planning.  However, it is not a one-size-fits-all solution. Borrowers should still weigh the pros and cons of a reverse mortgage carefully and compare it with other options.

Whenever people are making important financial decisions, we recommend seeking advice from trusted financial advisors.