Time: Save Your Home Equity Until You Really Need It

While reverse mortgages offer a number of positive benefits — namely, extra retirement income and no monthly mortgage payment — borrowers should be wary that taking out the loan spends down what’s likely their largest asset, experts say.

In a Time magazine “Ask the Expert” column, one reader says he and his wife have a home worth $700,000, which is nearly paid off, and no heirs. With this in mind, he asked whether getting a reverse mortgage would be a good idea.

The response?

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“Even though you don’t have heirs to leave the house to, you might need it later to help pay for assisted living or extended home health care,” said Sandy Jolley, a reverse mortgage suitability and abuse consultant in Los Angeles. “And you cannot take out another home equity loan once you have a reverse mortgage.”

Unlike others who advocate reverse mortgages should be used sooner rather than later, Jolley suggested the loan should be used as a last resort.

Instead, consult a trusted family member or a financial planner who’s not in the business of selling reverse mortgages about whether you really will need that money in order to live comfortably in retirement, she said.

“The combination of Social Security and your retirement savings … may provide the income you need to live the way you want to live. Save your equity until you really need it,” Jolley said.

To read the full column, click here.

Written by Emily Study

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  • I believe you should take out the reverse mortgage when you don’t need it and place all the equity into the line of credit (LOC). The balance in the line of credit will grow at a rate currently between 4 and 5 percent of the available balance. That means that if you place $300k in the LOC today you will about double your available balance in 10 years and triple it in 20 years. Don’t believe me, take a look at the amortization schedule. And if interest rates rise the picture gets even better (this is excellent hedge against inflation). And the best part is if the funds are never drawn they all go back to the heirs. Waiting until you need it is a mistake. You get less, it could cost more and you may not be in the best physical or mental condition to make the decision and sign the 100 plus pages (future estimate – my opinion – we are at about 80 signatures currently). Finally if borrowers can make monthly payments they can increase their available balance more and grow their LOC even more.

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