There are numerous ways to use a reverse mortgage, which is why it is often seen as a complicated product to those who are unfamiliar with it. There are also many strategies for a reverse mortgage that can be helpful in funding retirement, explains a recent post on Dirk Cotton’s blog, “The Retirement Cafe”.
“Approaching a retirement plan from a strategic perspective has several advantages,” explains Cotton, who frequently writes about personal finance topics and provides retirement planning advice as a fee-only financial planner. “In effect, strategic planning identifies and answers the larger problems first, and only then considers the best tactics to achieve those objectives.”
Cotton lists a number of strategies for using a reverse mortgage to help fund retirement. Some of them include a refinance strategy, a term and tenure strategy and a HECM for purchase strategy.
The refinance strategy, is one of the most common uses of a HECM, he says. It is simply the difference of paying a mortgage payment each month versus receiving a check every month instead. Though, Cotton does point out that if a homeowner is looking to pass their home without debt to their heirs, they should go the conventional mortgage route, but if the homeowner is ok with using built up home equity to pay bills, then a reverse mortgage could be perfect for them.
Using the term or tenure option when taking out a HECM is another option Cotton suggests.
“They [tenure payments] are similar to an annuity, except that annuities pay as long as the annuitants are still living,” he says in the post. “Another major difference between tenure payments and annuity is that the retiree may ‘leave money on the table’ if she dies soon after purchasing an annuity. If that happens with a HECM, there will be no such loss because the borrower will simply have borrowed less of her home equity.”
The HECM for purchase is also brought up in the blog as another way to potentially fund retirement. He suggests this option if a homeowner is looking into purchasing a new home, especially if the homeowner is already in retirement, because it can sometimes make it more difficult to qualify for a loan when someone does not have a steady income like they would have had in their working years.
These are just a few of the tips Cotton shares for using a reverse mortgage to help make retirement a bit less stressful. See what his other strategies are in his most recent post on The Retirement Cafe.
Written by Alana Stramowski