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For those over age 62, a reverse mortgage may be a useful tool. Fundamentally, they turn an illiquid asset into money you can spend. However, they shouldn’t be used “just because you can,” but instead for carefully thought through strategies for present, or future, needs.
Here’s some examples of possible needs, in no particular order. May one apply to you? I say “one” because money can only be spent once! So choose carefully!
By the way, HECM stands for Home Equity Conversion Mortgage.
- Need supplemental income to meet your needs? A reverse mortgage may be used for extra, tax-free, monthly income. This income is tax-free since you’re spending your own equity. Because it’s tax free, a dollar goes farther compared to taxable dollars. This tax free nature is true for the other examples too.
- They may be used as a line of credit (home equity line of credit or HELOC).
- They may be used for lump sum needs … where payments don’t need to be made, or payments are optional and in any amount.
- They may be used to purchase a home… called HECM for purchase. This is useful for someone wanting to downsize, or even up size home. This is also especially useful for those who are selling their current home and moving since the equity of the sold home can meet the requirements for equity in the new home to qualify for the HECM for purchase.
- They may be used immediately, or as a line of credit (HELOC) for current or future medical expenses for acute care (current or future), or for long term care expenses for chronic care (current or future).
Note that reverse mortgages work opposite of conventional mortgages. Rising interest rates help expand your line of credit for future needs (let it grow – before you need to use it). Repayment helps expand your line of credit as well. A skilled reverse mortgage specialist can explain how they may work specific to your situation.
Here’s a brief review “How the HECM Program Works” on the HUD website.
And, as in everything, Reverse Mortgages are legitimate and supported by the US Government (HUD). Be aware that there are scams you should be on the lookout too when you look for a reverse mortgage, or have one already! Scammers turn a good thing into bad.
Unsure of a lender – here’s a national firm you may consider that specializes in reverse mortgages.
PS. I do NOT specialize in reverse mortgages. As a planner, I look at tools that may help solve problems people have, and then refer people to specialists to implement that tool. A reverse mortgage may be a useful tool in the right situation and circumstances.
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