As you get older, the concept of retirement changes from some nebulous future concept to something far more immediate.
There are a multitude of ways that you can begin preparing for your retirement financially, from looking at the status of your 401k to rearranging your budget around your savings and Social Security.
One powerful tool that you should look into when it comes to planning your retirement is the reverse mortgage. The concept of a reverse mortgage may seem daunting at first, but there are many ways it can be a powerful tool to help you in your retirement.
Here are three of the ways reverse mortgages can help you plan your retirement.
1: Take Advantage of Tax-Free Income
Because a reverse mortgage functions by having you borrow against the value of your primary residence, you will be able to get the money from a reverse mortgage without paying taxes.
To find out how much you will be able to borrow against your home’s value over time, use a reverse mortgage calculator.
There are a couple of different ways you can get the money from a reverse mortgage.
The first is by getting the money monthly, similar to an annuity or Social Security. Secondly, you can choose to have an open line of credit that you can dip into as needed up to a certain amount, very similar to a credit card.
Finally, you can opt to receive your reverse mortgage money as a lump sum, which is particularly useful if you need to make a major purchase, such as medical accessibility equipment, in order to better live your retirement.
In addition, it’s possible to get your reverse mortgage money through a combination of these methods.
2: You WILL Be Able to Pay it Back
When people who expect to retire and face the inevitable loss of income that results, they are often wary of taking any financial steps that may burden them later on or fall on their children to pay back.
A reverse mortgage, since it is meant for people who are retiring or thinking about retirement, is designed to not financially burden you or your descendants.
The maximum you can borrow at any time is the value of your home at the time you get the reverse mortgage – meaning that, when you or your children sell your home, you will be able to easily pay the reverse mortgage back. In addition, even if you use your reverse mortgage for longer than originally planned and therefore have borrowed more than the house is worth, your estate will still only owe up to the value of the home.
This means that you and your estate are protected in the event of a housing crash or other unexpected devaluation of your home.
3: Your Line of Credit Can Grow
The line of credit option for a reverse mortgage is one of the most powerful and flexible retirement financial planning options available.
Not only will you be able to use the line of credit for everything from small daily expenses to large lump sum purchases, there is also a growth feature to the line of credit that can make it so you don’t have to worry about the line of credit running out as quickly as it may seem at first.
The growth feature is currently at about 4% per year and functions similarly to other credit interest options. For example, if you have a $100,000 line of credit on your reverse mortgage but are still working part time and don’t need to dip in, the actual amount available will grow to $104,000 after a year.
This means that, with smart financial planning, you can turn your reverse mortgage’s line of credit into a viable income stream or use it for large purchases without worrying about hitting your borrowing limit.
Photo by Tom Rumble on Unsplash
