For many years reverse mortgages were broadly considered a loan of last resort. But as these financial vehicles have become more mainstream, and financial advisors have begun giving them a second look, a new criticism has emerged: they are yet another way for the rich to get richer. Neither categorization is entirely accurate. However, looking at them through the lens of wealth, highlights some of the reasons that reverse mortgages are actually well-suited to people from a variety of backgrounds. Here’s a few reasons why reverse mortgages aren’t just for the rich.
1. There is no minimum salary or credit score required for a HECM
Unlike a traditional loan, lenders don’t require a minimum income or credit score to be eligible for a Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage. Not only is wealth not a requirement for reverse mortgage eligibility, but there are ways for people who don’t quite meet the financial requirements of the loan to qualify.
In cases where a lender determines, based on the financial assessment, that a borrower may come up short with property taxes, homeowner’s insurance, or home maintenance, the lender could require a life expectancy set aside (LESA) to cover those amounts in the future. Having a LESA established means the borrower will receive less proceeds from the loan. However, it also makes the loan available to borrowers in a wider range of financial situations.
2. Wealthy individuals could have difficulty with the residence requirement
Reverse mortgages require that borrowers maintain their home as their principal residence, meaning they must live there for most of the year. This could complicate matters for wealthy individuals with multiple homes in different locations. But for many people who own only one home, this doesn’t tend to be much of an issue.
3. Cash flow offers flexibility
For the ordinary individual, the advantage of not making a mortgage payment and receiving proceeds can help with medical emergencies, home repairs, or unexpected financial emergencies. So, regardless of a person’s bank account balance, breathing room and financial flexibility are good things.
4. There is no impact on your Social Security and Medicare
Some borrowers may worry that taking out a reverse mortgage could affect their Social Security or Medicare benefits. Even more affluent individuals may worry about this. Fortunately, proceeds from a reverse mortgage will not impact those government distributions. Since reverse mortgages are loans, they are not considered income. These loans don’t impact the income threshold of many government-sponsored benefits programs. Similarly, these loans are income-tax-free for the same reason.
Keep in mind need-based payments from programs like SSI and Medicaid may be impacted by reverse mortgage proceeds. Check with your financial advisor on how a reverse mortgage could impact your need-based government payments.
5. There are multiple ways to receive proceeds
People in different financial situations will likely benefit from the numerous ways borrowers can receive proceeds. Some borrowers may want to take a lump sum with an adjustable rate and reserve the remaining amount for a line of credit. The line of credit option is particularly beneficial since the unused portion can grow over time and allow borrowers to borrow more money when they need to access it. This could be helpful for individuals who don’t necessarily have the funds to cover large expenses like college expenses for children or grandchildren or a medical crisis.
6. Allow your investment portfolio to grow
Most individuals who don’t have an expansive and diverse retirement portfolio want to make certain it grows as much as it can before withdrawing those assets. A reverse mortgage could allow portfolio growth to occur and potentially avoid or delay the tax consequences of withdrawing those assets. This strategy may be a viable retirement approach for individuals with fixed incomes and smaller investment portfolios.
In reality, reverse mortgages aren’t just for the rich, nor are they only for those with more modest means. They’re for anyone who would like to access a portion of their home’s equity while eliminating required monthly mortgage payments and continue living in the home. They provide choices for people at all income levels, and, in the end, choice can be the highest form of wealth.
