04 Dec Would a reverse mortgage solve our budget woes?

Q. My wife and I are retired. We downsized, sold our home and purchased a retirement home last year. We moved to be close to our three married children and seven grandchildren. We put down a deposit of approximately $125,000 and mortgaged just over $300,000 at just under 7%. With Social Security and two small pensions, we’re short on our monthly budget. We’re thinking of taking out a reverse mortgage to eliminate the monthly mortgage payment, which would leave us with a small budget surplus each month. Doing this would mean putting approximately $130,000 more toward the current mortgage so as to qualify for a reverse mortgage. This would take our savings down to a few thousand dollars and leave us with two IRA accounts totaling approximately $220,000 from which to draw from if necessary. Is this a good plan?
— Homeowner

A. Congratulations on your new home.

The decision to take out a reverse mortgage is a significant financial move.

We’re glad you are weighing the pros and cons before proceeding, especially considering your current financial situation.

Using a reverse mortgage to pay off your existing mortgage can free up cash flow by eliminating the monthly mortgage payment, said Michael Green, a certified financial planner with GYL Financial Synergies in Parsippany.

This could potentially alleviate your budget constraints, he said.

“However, taking out a reverse mortgage involves significant upfront costs and can deplete your savings considerably,” he said. “You mentioned that this would reduce your savings to just a few thousand dollars, which might not be advisable considering unforeseen expenses or emergencies.”

By depleting your savings and tying up the equity in your home through a reverse mortgage, you might limit your ability to handle unexpected expenses or long-term care needs, Green said, noting that the IRA accounts might provide a safety net, but drawing from these accounts can have significant tax implications and might affect your future income.

With a reverse mortgage, the loan balance increases over time, which could reduce the inheritance you leave for your children and grandchildren, he said.

“Reverse mortgages are more beneficial for older homeowners, typically those in their 70s or older,” Greens said. “It’s important to consider your age and how long you plan to stay in the home. Also, you must consider what plan you have in place for long-term care needs in future years.”

Before proceeding with a reverse mortgage, he recommends you seek advice from a financial planner who specializes in retirement and reverse mortgages. They can provide personalized guidance based on your specific financial situation and goals, he said.

“While a reverse mortgage can offer short-term relief by eliminating your monthly mortgage payment, it’s crucial to consider the long-term implications, such as reduced savings, potential impact on inheritance for your children and future long term care needs,” he said. “Exploring alternative options, adjusting your budget, downsizing your home, or seeking professional financial advice might be beneficial in finding a solution that meets your financial needs without overly compromising your future financial security.”

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This story was originally published on Dec. 4, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.