How To Avoid Expiring Reverse Mortgage Proceeds

The Consumer Financial Protection Bureau (CFPB) advises that younger retirees without longer life expectancies have a higher risk of depleting their home equity through a reverse mortgage. For those who plan to "age in place," or remain in their current houses until death, this isn't an issue; however, it may become one if they ever decide to relocate.

This might lead you to believe that delaying the initiation of a reverse mortgage for as long as possible is the best approach to ensure that you don't outlive the money. You can only spend what you have, and older borrowers have a higher principal limit with reverse mortgages.

Of course, there are numerous ways to borrow against your house, use credit cards irresponsibly, and otherwise ruin your financial future. Avoiding a reverse mortgage is no guarantee against wasteful expenditure.

Current thinking among retirement or reverse mortgage specialists like Wade Pfau and Jack M. Guttentag suggests that the optimum use of a reverse mortgage is to get a line of credit as soon as you're eligible and then leave it alone and let it grow until you need the money.

We could wait, but why? The reason because of the unknown future of interest rates. A reverse mortgage's initial credit line increases proportionately to the lower interest rate at which it is taken out. Your credit limit will rise in tandem with rate hikes.

You may only benefit from being able to borrow a little due to your advanced years if you wait to open a reverse mortgage line of credit since interest rates may rise.

Substituting a New Strategy

Consult your lender about adjusting your repayment schedule if you currently have a reverse mortgage but are concerned about running out of money. If you have yet to opt for a single, set payment, you have some leeway in adjusting your repayment terms if you don't exceed the loan's maximum principle. Changing your payment schedule is substantially less work than refinancing and typically only incurs a little charge.

The Predicament of the Non-Borrowing Spouse

If you have a youthful, non-borrowing spouse, they could outlive the reverse mortgage proceeds if you pass away first, regardless of the payment plan you select. If the borrower dies before the non-borrowing spouse, new laws that went into effect in 2015 ensure that the non-borrowing spouse can continue living in the home.

But a spouse who did not cosign the loan cannot collect any further payments in the event of the borrower's death. As a result of this provision, it is simple for a non-borrowing spouse to outlive the reverse mortgage money.

The reverse mortgage can be paid off by the sale of the home by the surviving spouse. But, depending on the value of the house and the remaining loan debt, more than the proceeds from the sale may be required to support the survivor. It is possible to refinance out of a reverse mortgage if the surviving spouse has sufficient income to qualify for a conventional mortgage.

If the reverse mortgage sum exceeds the home's value, the surviving spouse is better off remaining in the house than selling it or allowing the lender to foreclose.

While taking out a reverse mortgage, one must ensure that the loss of proceeds would not cause financial hardship for the non-borrowing spouse in the event of the first death of either spouse.

So, What Choices Do You Have Besides A Reverse Mortgage?

Fortunately, reverse mortgages aren't your only option. You may benefit more from a home equity loan, HELOC, cash-out refinance, or refinancing your mortgage. Long-term financial security in retirement can also be achieved through modifying spending patterns and reducing one's property.

Would I Still Have To Make Payments If I Had A Reverse Mortgage?

No, there is no prepayment penalty on a reverse mortgage, so you can make payments to pay down the loan sum while you are alive. If you make a partial payment, your lender must first use that money toward the interest you owe, then toward any fees associated with the loan, and only then toward the loan's principal. In contrast to a traditional mortgage, the principle on a reverse mortgage does not need to be paid back as long as the loan terms are met.

The Bottom Line

A reverse mortgage allows you to stay in your house for the rest of your life, even if your home equity has been depleted. You or your loved one should know the potential downsides of a reverse mortgage before deciding to get one. It's also vital to realize that a reverse mortgage may assist seniors in avoiding running out of money in retirement, provided they have a firm grasp on how the various payment plans function and how they could responsibly employ the funds.