Kiplinger: Why Retirees Should Consider Using a Reverse Mortgage for Cash Flow

Retiring without having to make regular mortgage payments is a big dream for many retirees, but is becoming increasingly unattainable for many Americans looking to transition out of work. This is one of the core reasons why home equity broadly – and reverse mortgages specifically – could be a viable option for a senior looking to retire comfortably, according to a new article at Kiplinger Personal Finance.

“Many financial planners believe tapping that wealth in retirement or just before makes sense if done wisely for the right reasons,” the article says. “Your home’s equity might be the lifeline you need to avoid drawing from your investments during a market downturn or taking on more portfolio risk to make up for any investing shortfalls.”

While the easiest way for someone to tap into their equity is through the sale of the home, many seniors don’t want to entertain that option either because they don’t want to move, or they don’t want to enter the fray of the modern housing market. This is when other alternative options for home equity tapping can emerge, including a reverse mortgage.

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Speaking with a couple in their 70s who recently refinanced into a reverse mortgage – Ray and Anne Smith, of Jasper, Ga. – they decided to enter into a reverse mortgage as a financial “cushion,” offering access to cash beyond their existing benefits including Social Security and an IRA.

“I wanted to make sure we will be comfortable and can live in this house as long as we want to,” Ray Smith told Kiplinger of his decision.

After a home appraisal at $350,000 with maximum proceeds of $230,000, they used the proceeds to pay off the remaining mortgage balance of $80,000, took a credit line of $150,000 and immediately withdrew $25,000 to pay off credit cards.

Product changes and additional changes like the financial assessment have allowed the reverse mortgage product category to “overcome a somewhat tarnished reputation,” the article says. This is because those product changes have allowed for the correction of previously problematic product features, and additional deliberation about the potential benefits of reverse mortgages by academics have also helped to reform the industry’s image, the article reads.

“You may leave more to the kids if you strategically use a reverse mortgage,” said John Salter, wealth manager for Evensky & Katz Wealth Management in Lubbock, Tex. who has studied the reverse mortgage product category.

Still, shopping around for a reverse mortgage is an essential part of the process, since individual lenders can vary on details such as lender and origination fees, margins and closing costs, according to National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin.

“Plus, you want to work with a professional who will meet you where you want to meet them—over the phone, the internet or the kitchen table,” Irwin tells Kiplinger.

Read the article at Kiplinger Personal Finance.

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  • When the right subject matter is presented, look at the results.

    Over a decade ago, it was a disgrace to the industry as to how many responsible people in this industry barely ever referred to HECM proceeds as anything other than income. Today we have a core that see reverse mortgage proceeds for what they are, cash flow. For many in the financial community, the conversation has accordingly and appropriately adjusted.

    The title of this article is very, very good. UNLESS the borrower insists on calling reverse mortgage proceeds income, it is past the time when originators and other responsible industry participants should be dropping the word income in their description of HECM proceeds.

    In looking at the linked article, its description of when reverse mortgage interest is deductible is glaringly WRONG. For interest is paid, it is not deductible. Then it still needs to meet the requirement that interest must be acquisition indebtedness. Paying off any principal is not required for interest related to acquisition indebtedness to be deductible for cash basis individuals (the vast majority of individual income tax filers) when the loan is classified as a home mortgage under the Internal Revenue Code (also referred to as 26 USC).

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