Retirement News for Senior Citizens

Retirement News for Seniors

Three strategies for using a reverse mortgage to improve retirement security

Forbes contributor Jamie Hopkins offers insights for seniors on smart ways to use reverse mortgage; recent regulations changes makes it better  

Small house as symbol of home equity changing handsMay 20, 2015 – Home equity is probably the most valuable asset owned by most retirees in the U.S. Properly leveraging this home equity is becoming a crucial part of a secure retirement, according to an article in Forbes by Jamie Hopkins. He sees a reverse mortgage, particularly with the new rules passed by HUD last month, as a way for some to significantly improve retirement income security.

“There are a variety of ways to tap into one’s home equity,” writes Hopkins, “such as downsizing, taking a traditional home equity loan, home sharing, entering into a sale leaseback arrangement, or entering into a reverse mortgage.”

He cautions that a reverse mortgage is not the best option for everyone but discusses three strategies that may work “for more than just the cash-poor, house-rich client.

The new rules finalized last month apply to the Home Equity Conversion Mortgage (“HECM”) program, which is the primary reverse mortgage program. The new rules will keep many seniors from getting a reverse mortgage is the government tries to reduce the default rate.

Following are the three strategies that may help seniors in their financial planning that are discussed by Hopkins in the Forbes article.

First, a standby reverse mortgage line of credit can be used to mitigate market risk and other retirement income planning risks.

“Instead of using a reverse mortgage towards the end of one’s retirement when assets might be dwindling, strategic use of a reverse mortgage closer to the front end of one’s retirement could be even more beneficial,” he suggests.

“The second strategic use of reverse mortgages can be to postpone claiming Social Security benefits, or to defer one’s employer sponsored pension plan,” he writes.

“This strategy (depending on the value of your home) actually uses up a large portion of your equity early on in retirement, instead of relying upon it later in retirement.

The third strategic use of a reverse mortgage is to “exchange debt for income” by replacing a traditional mortgage payment with a reverse mortgage. More and more retirees enter into retirement with an outstanding mortgage. Some retirees, he says, are now taking a reverse mortgage to pay off their traditional mortgage, and at the same time creating a line of credit or generating additional income.

He does cautions seniors that a comprehensive understanding of the risks and costs associated with a reverse mortgage need to be well understood and evaluated before deciding to enter into one.

A reverse mortgage decision should only be made “after doing your due diligence, consulting an expert, finding a reputable lender, and incorporating the decision into your overall retirement plan.

● The changes in the Reverse Mortgage regulations proposed by the Department of Housing and Urban Development last November that became effective in April (pdf).

● Read the complete article New Reverse Mortgage Rules Open Door To A More Secure Retirement, Forbes.

Jamie Hopkins covers retirement income planning, retirement, and other legal issues.

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