When many people think of a reverse mortgage, they think of it exclusively as a “loan of last resort.” Frankly, this couldn’t be further from the truth nowadays. The modern reverse mortgage has evolved into a flexible financial tool suitable for a variety of retirement planning purposes. While many seniors make use of the reverse mortgage to gain immediate access to their home equity, some savvy homeowners use it to bolster their existing retirement portfolio by tapping into a stable asset that has the potential to grow over time. Although many use the reverse mortgage to consolidate debts and handle other pressing issues, seniors that take advantage of the reverse mortgage line of credit benefit from the possibility of sustained growth over time. So, how does this work, exactly?
Building Your Nest Egg with a Line of Credit
Nowadays, many financial advisors are recommending the reverse mortgage even to homeowners that don’t have an immediate need to spend their home equity. In the words of Jamie Hopkins, associate professor of taxation at The American College of Financial Services, quoted in an article on CNBC: “They have their home, Social Security, and a little bit of savings. Why not use the home equity?”
In particular, advisors suggest that retirees take out a line of credit early on so that their available funds will have time to grow in value. Indeed, with a reverse mortgage line of credit, homeowners can gain access to a fund that has the potential to grow over time.
How Does the Line of Credit Grow?
In order to figure out your growth rate, several factors will be taken into consideration. Your interest rate, your mortgage insurance premium (MIP), the current index value, and the margin will all be compiled to create your growth rate. Furthermore, this is the same rate that is applied to your outstanding balance when calculating your interest and MIP every month. Just remember that because this is an adjustable rate, it is subject to change. Because growth occurs at a compounding rate over time, you will benefit from waiting as long as possible before accessing your funds.
Planning for the Future
As the saying goes: “proper, prior planning prevents poor performance.” It’s no secret that many seniors around the country are facing difficulty as they prepare for retirement. But, thanks to the reverse mortgage line of credit, qualifying seniors can gain access to otherwise-unusable home equity that is still capable of growing regardless of changing home values.
If you’re hesitant to get an adjustable rate loan (which is what the line of credit is), the fixed rate HECM can still serve as a valuable tool in the retirement process. By utilizing the lump sum cash from this loan, you could defer drawing from other assets (such as Social Security benefits or other investments) thereby allowing them more time to grow in value. No matter which type of reverse mortgage you choose, you could benefit from the money it provides even if you aren’t strictly in need of immediate cash. Of course, the best way to determine if a reverse mortgage is right for you is to consult your financial advisor.