A reverse mortgage is a type of loan that allows homeowners who are 62 years or older to borrow against part of their home’s equity. The loan proceeds can be distributed in multiple ways, and the loan does not have to be repaid until the borrower dies, permanently moves out, or sells the home. (1) While there are no requirements as to what the money can be used for, here are some thoughts on various ways in which the proceeds from a reverse mortgage can be used:
Paying off a current mortgage or other debts can substantially ease budgetary pressures on retirees who now find themselves in a fixed income scenario. Because the reverse mortgage does not require monthly payments, the necessary cash flow requirements can change significantly.
Reverse mortgages can be used to pay for college tuition and other educational expenses. This can be especially helpful for grandparents who want to help their grandchildren pay for college.
Reverse mortgages can be used to finance a wedding or other marriage-related expenses. This can be especially helpful for seniors who want to get married later in life, or to assist with children or grandchildren who are getting married.
Reverse mortgages can be used to transfer wealth to future generations. This can be done by using the proceeds from the loan to purchase an investment property or other assets that can be passed down to heirs. Additionally, transferring wealth from the estate to avoid the sunset estate tax changes that are forthcoming can be a wise financial strategy to fund the transfer of wealth.
Reverse mortgages can be used to purchase a second home. While it is key to remember that the holder of a reverse mortgage is required to live in the home secured by the loan as their principal residence, they certainly can purchase second/vacation homes. This can be especially helpful for seniors who want to frequently visit their children and grandchildren who live out of town. The benefits being that they can secure an additional part time residence without incurring the monthly cost of a mortgage payment.
Perhaps a family member is trying to buy a home and you would like to assist but don’t want to liquidate any of your income producing assets and experience negative tax consequences as a result. A reverse mortgage can be the source of funds to assist the family member.
Establishing a line of credit that grows in available cash over time can be a great way to set aside reserve funds for unexpected expenses, such as long-term health care, auto or home repairs, or anything else that is unexpected2.
Please note that these are just some examples of how the proceeds from a reverse mortgage can be used. It’s important to consult with a financial advisor before making any decisions about how to use the funds. It is also important to consult with an experienced mortgage professional who can guide you through your options and present solutions customized for your own personal needs.
