Dear Rick:
I need your help. About five years ago I retired. At the time even though the money I had was not enough to retire, I was planning on receiving an inheritance from an elderly aunt. Unfortunately for me when my aunt passed, she had very little left over. Because I inherited very little I realized I have to make some adjustments. My solution is that since I’ll be turning 62 in January is to do a reverse mortgage. I figure with the money from the reverse mortgage and me taking Social Security at 62, I can get by. What do you think?
Brad
Dear Brad:
On the whole, I have no problem with reverse mortgages. They can be a very effective tool for seniors. However, in your situation I probably would not recommend one.
Basically, a reverse mortgage allows someone to access the equity in their home to use during their lifetime. The advantage of a reverse mortgage is that you don’t have to make payments during your lifetime. It is only after death or if you decide to sell the home, that the mortgage comes due. Therefore, seniors can effectively increase their cash flow by doing a reverse mortgage.
In calculating how much money you can borrow in a reverse mortgage, one of the factors is your age. The older you are the greater amount of a reverse mortgage you can obtain. When someone gets a reverse mortgage at 62 they can’t borrow nearly the amount if they were in their 70s or 80s. My fear is that if you do a reverse mortgage now it may limit your flexibility in the future. Remember, how a reverse mortgage works is that as time goes on your mortgage balance gets higher and higher. Since you’re not making a mortgage payment, interest is accruing and added to the balance of your mortgage. If years down the road you decide to move, your equity would be reduced dramatically because of the accrual of interest. Therefore, by doing a reverse mortgage you will lose flexibility and I think you are too young to lose flexibility.
In the case at hand, I would consider potentially going back to work, full time or part time. I recognize that it is probably not something you want to do; however, I think it is something to consider. I think the strategy of getting a reverse mortgage and taking your Social Security is going to cause you problems in the future. After all, in today’s world you need to make sure you have a rising income the rest of your life and I’m not sure your strategy would allow that. My advice would be to look for a job and delay your Social Security until you receive your full benefits. I think following this strategy will allow you to have much greater flexibility in the future.
On the whole, I believe a reverse mortgage makes sense for older seniors who need additional resources to stay in their home. I am not a fan of reverse mortgages to be used to fund vacations, grandchildren’s college education or to loan money to children. A reverse mortgage is best used for seniors who need to increase their income so they can enjoy a comfortable retirement.
One last note and something I always remind people; you should never ever depend upon inheritances. You never know how much someone is going to be worth at the time of their death and you never know if you’re actually going to be inheriting money. That is why I always tell people to never rely or depend upon an inheritance; only rely on your own resources.
Good luck!
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com