A year or so ago, then four years into retirement and in the midst of the real estate “craze”, you had briefly considered selling your home, but instead made the decision to stay put. You arranged for a small home equity loan (less than a quarter of the home’s appraised value at the time) to finance a bathroom and kitchen makeover. As a divorced man in good health with no need to support either of your two sons, you had made a decision to “age in place”.
In the interest of paying off that loan without taking a “hit” to your investment accounts, at a time when they are diminished in value, you have been considering a reverse mortgage. However, you keep reading about analysts “slashing” their U.S. Housing market outlook” over the next year or two. What would happen, you wonder, if you arranged for a reverse mortgage line of credit and then home values dropped significantly?
Notwithstanding all the predictions you’re hearing from various pundits, there is no way to know what either interest rates or home values will be at any particular time in the future. Remember, though, with a reverse mortgage the unused portion of your line of credit will be growing at the same rate as the mortgage balance is accruing interest, and it will continue to grow independent of any change in home value.
The second factor to consider is the “protective effect” that a reverse mortgage can have on your investments, to the extent that you substitute tax-free withdrawals out of your own housing wealth to replace taxable distributions from retirement investment accounts.
Could the value of homes decrease over the next year or so? The answer is yes, of course. But remember – unlike the case with your current line of credit, with a reverse mortgage, until and unless you leave your home permanently (move out or die), there is no obligation to make any loan payments at all.
Your reverse mortgage loan proceeds (based on the current value of your home) would first go towards paying off your current “forward” line of credit balance, freeing you from monthly payments and then serving as a source for tax-free withdrawals as needed going forward, “shielding” your investment accounts by reducing your need to make withdrawals during stock market declines..
No matter the “what-if someday” scenario, it sounds as if a reverse mortgage decision could make a positive difference beginning right now.
Please consult a tax advisor. Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.