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by Andy Millard

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It’s a bedrock bit of advice I always gave to financial planning clients: Do not enter retirement with a mortgage. Seriously. If you can’t afford to pay off your mortgage, you probably can’t afford to retire.

It stands to reason. For most folks, retirement means a lower income and a simpler life. You want to reduce your fixed monthly costs to almost zero if possible. That means eliminating the house payment, which is by far the biggest monthly expense for most of us.

Our three most basic needs are food, clothing and shelter. With your house paid off, at least you’ll have a place to live when times get tough. As long as you can come up with something to wear and something to eat, you should be in pretty decent shape.

Which is why I also counseled clients against getting a reverse mortgage. Touted by those who sell them as a way to help pay for retirement, a reverse mortgage is really just a mortgage—only backwards. With a standard mortgage, the amount you owe shrinks over time; with a reverse mortgage, the amount you owe grows over time.

I could never sign off on a plan that reduced a homeowner’s equity—potentially to zero—at a time when they needed it the most. But reverse mortgages have evolved, and we’re facing the financial fallout from a worldwide pandemic. As a result, my thinking has evolved as well. I now believe that there are some situations where a reverse mortgage might make sense.

Here’s a key feature of a reverse mortgage: the lender can never kick you out of your home as long as you pay the taxes, insurance and upkeep. The loan will need to be repaid eventually, of course, but only after you move out—possibly at your death. Another plus: the loan is designed so that you never have to write a check to the lender. If the balance is greater than the value of your home at the time of repayment, the lender (or a government agency guarantor) covers the shortfall.

With the two potential deal-breakers out of the way, let’s look at the main benefit: the ability to tap into the value of your home without ever having to leave it.

The total amount available to you is based on the value of your equity; it will also vary depending on your age and marital status. There are three possible methods by which you could receive distributions: a fixed monthly payment, a lump sum or an equity line that you tap into as needed. If you chose monthly payments, there are several sub-options: a fixed period of time, until you die or until the second spouse dies in the case of a married couple.

When you leave the home—either by dying or moving into a different type of living arrangement, such as a retirement facility or nursing home—the loan must be repaid.

This should be an option of last resort for most people. It’s a permanent decision in most cases: once you get into it, you’re unlikely to get out. If you have to move out earlier than you had planned, the loan will become due and payments to you may dry up—along with your equity.

Oh, and did I mention the fees? They’re really high, and they’ll affect the amount you receive from the lender.

Despite the downsides, if you have no other realistic source for needed retirement income, a reverse mortgage might be worth a look. There’s lots of information about this topic online, but much of it is from companies that sell reverse mortgages. Potential buyer beware.

And before you make a big decision like this, you should talk with a financial advisor—one who does NOT sell reverse mortgages—as well as trusted family members.

 

Andy Millard, CFP® is a retired financial planner and former principal of Millard & Company, an investment management firm. He does not offer financial planning services; this column is not intended as advice but rather education, commentary and opinion. Consult a professional advisor. If you have questions about financial planning or investments, feel free to submit them to Andy at camillard@mac.com.