f you're retired and recently saw the value of your invested retirement funds erode, you're probably facing a bad choice: Cut spending until the market recovers, or withdraw your usual amount.
The catch on making your usual draw is that you need to sell off more of your invested funds to raise the same amount of money.
Doing this could cause you to run out of money later in retirement.
This dilemma is especially serious in your early retirement years.
If you continue to make your usual withdrawals, your savings may decrease significantly. Even
The 2020 CARES ACT suspended the rule to take Required Minimum Distributions (RMD) while we battle the Covid-19 pandemic.
To give your investment portfolio time to recover, you must reduce withdrawals. But you may need help paying the bills. This is where a reverse mortgage can help.
With a reverse mortgage, you may be able to smooth out the bumps in the market by leveraging the value of your home. According to
By borrowing against the value of their home, homeowners can receive a lump sum, fixed monthly payments, or a line of credit to draw on when needed, Giordano said. In this transaction, homeowners do not relinquish title or control; they retain homeownership just like any home with a mortgage on it. But unlike a forward (or traditional) mortgage, which requires monthly loan payments, no payments on the loan balance are due until the last homeowner dies, moves out of the home or sells it.
Giordano notes: "There's evidence now that homeowners who prepared for a bear market are avoiding having to sell out of a losing portfolio, which is so devastating.
Reverse mortgage servicers have reported that the draws people are taking from reverse mortgages are significantly larger and more frequent than before the downturn. Folks with reverse mortgage in place are relying on them as a substitute for portfolio distributions."
Reverse mortgage: Flexible Loan Terms Include a Line of Credit The vast majority of reverse mortgages are offered by lenders approved by the
The loan itself is insured by the
An FHA-insured reverse mortgage is called a home equity conversion mortgage, or HECM. This type of loan, available for those age 62 or older, allows borrowers to draw equity from their homes without paying a monthly mortgage payment.
(Like with all mortgages, the homeowner continues to be responsible for paying property taxes and homeowner's insurance as well as any maintenance of the home.)
Many people think of reverse mortgages simply as a way to receive secure monthly income or perhaps to draw a lump-sum payment. But establishing a line of credit reverse mortgage is another option for homeowners.
Giordano explained that when using the FHA-insured reverse mortgage's line of credit, no monthly payment for the principal and interest is required.
Other benefits of using a reverse mortgage line of credit include:
· The line of credit can't be frozen, reduced or canceled as long as the terms of the loan are met.
· The borrower can never owe more on the loan than what the house is worth when the loan is repaid.
· An unused line of credit grows, regardless of the home's value.
Growing credit access is guaranteed by the FHA insurance component of the loan. It is even possible for the value of the line of credit to exceed that of the home.
In comparison, a regular home equity line of credit (HELOC) does require monthly principal and interest payments, is subject to more strict lending standards, and isn't guaranteed by the FHA.
There's also no growth component to home equity lines of credit, and banks can cancel, freeze or reduce credit. In the last recession, for example, some homeowners who thought they were protected with a traditional line of credit were disappointed when the lenders refused to provide credit just when it was needed most.
The market moves up and down.
When a portfolio rebounds and resumes its upward trajectory, the homeowner could choose to pay down the reverse mortgage so that the full line of credit is available in case of another downturn. There are no penalties for those payments.
Otherwise, the loan can be repaid when the home is sold. The choice is the homeowner's.
If the heirs wish to retain the family home, they may do so by arranging their own financing to pay off the reverse mortgage loan balance. The lender cannot take an equity share so all remaining equity stays with the family.
Reducing Costs|Expanding Assets in Retirement Budget A reverse mortgage also can help in a downturn by reducing costs in retirement. In good times, having regular mortgage in retirement can be fine. "But the more mandatory obligations you have in a month, the more stress it's going to put on your savings in bear markets," Giordano said.
For example, if you have a
Most retirees know immediately what their lives would be like without a monthly mortgage payment!
And for many Americans, a reverse mortgage line of credit is worth discussing with a financial professional. It's a way to avoid doing long-term damage to savings because of market turbulence.
Substituting draws from invested funds with draws on a reverse mortgage puts the house to work in a particularly effective way. To give you some idea of how powerful the growing line of credit can be, here is an unsolicited testimonial from a Mutual of
The peace of mind that comes with access to immediate cash flow for whatever financial and medical retirement challenges bring is an important factor in considering whether or not to coordinate the housing asset as part of the retirement planning process.
"The house represents about twothirds of the average American's net worth," Giordano said. "That's a pretty big asset that isn't being used."
To learn more about the modern reverse mortgage and how it can help secure your retirement, call