In retirement you may find yourself in need of alternate income streams.  With unpredictable volatility in the market and high taxes on other sources of income, a reverse mortgage may be a solution.

 

What is a reverse mortgage?

Reverse mortgages are a way to give yourself a loan without having to directly pay it back. When taking out a reverse mortgage, you borrow money against the value of your home. The loan is not paid back by you, but is instead paid back when the house is sold.

What can you use it for?

When taking out a reverse mortgage, you are paid money as if it is a loan. Therefore, it isn’t taxed. Having a tax free stream of income could be very useful in retirement.

Some retirees use this income to help them delay taking Social Security payments. Taking out payments at a later age helps to increase your monthly payments. This amount can add up over the lifetime of your retirement, giving you substantially more income in the long run.

Others use a reverse mortgage to pay off their current mortgage. Increasing amounts of retirees are entering retirement with debt, including mortgages. Having debt during retirement can negatively impact the lifestyle you want to create for yourself. By using a reverse mortgage, you could pay off the remaining value of your mortgage, so long as the loan you get is less than 50% of your home’s value. This will help to alleviate some debt and free up extra resources for other areas of retirement.

Reverse mortgages have a slew of other uses. They can be used to pay off taxes incurred from withdrawing from your 401k or open a line of credit to provide you with consistent income throughout retirement.

Are there downsides?

Any financial product carries risk when used improperly. Those with reverse mortgages run the risk of spending their loan too quickly and losing their equity in their home.

You must also keep up with property and insurance payments. Failing to pay lead many reverse mortgage owners into default. Reverse mortgages are risky for those who are financially struggling and use it to help keep their head above water. It becomes easy to fall behind on payments and end up in default.

While there are risks, when properly used, a reverse mortgage could add the extra cushion you need in your retirement and add a bit of comfort. While deciding if this is best for you, you may want to discuss it with a trusted financial advisor.