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4 Smart Ways to Use Money from a Reverse Mortgage
By Mallika Mitra MONEY RESEARCH COLLECTIVE
With the cost of everything from gas to groceries to health care putting pressure on Americans’ wallets, it’s important to consider every financial tool in your tool belt. While that may mean locking in certificate of deposit (CD) rates or opening an individual retirement account (IRA), it can also mean taking advantage of one of your biggest assets: your home.
Reverse mortgages allow homeowners age 62 and older to borrow money in the form of a lump sum, line of credit, monthly payments or a combination of these methods while using their house to secure the loan. Reverse mortgage lenders will send the homeowner cash and, when the borrower dies or no longer lives in the home, it is typically sold, and the proceeds are used to repay the lender. If there’s any money left over, it goes to the estate.
Like any financial product, reverse mortgages certainly come with pros and cons. The upfront costs can be more expensive than alternatives like home equity lines of credit (though these fees can typically be rolled into your loan). It’s also important to understand that the loan balance grows over time, which could decrease the value of your estate or inheritance. But reverse mortgages can also supply critical cash flow to older homeowners on a fixed income.
If you’re considering including a reverse mortgage in your retirement planning (and you’ve chatted with a professional to make sure it’s the right move for you), here are four smart ways you can use the cash from your reverse mortgage loan.
1. Get rid of your monthly mortgage payments
Mortgage debt for older Americans has been on the rise over the last decade. The share of homeowners ages 65 to 79 with debt secured by their primary home (including mortgages, home equity loans and HELOCs) jumped from 24% to 41% between 1989 and 2022, according to a study published last year by the Joint Center for Housing Studies of Harvard University. The median mortgage debt also skyrocketed more than 400% during that time.
Paying off a mortgage can be challenging for anyone while balancing everyday costs like utilities and food, but it can be especially hard for retirees who have recently said goodbye to their full-time job. A reverse mortgage can free up some of your budget by allowing you to use the loan to pay off your existing mortgage. In addition, one key benefit of reverse mortgages is that monthly payments aren’t required. The result is that you can stay in your home without the burden of monthly mortgage payments. (You’ll still be responsible for the loan balance, but the repayment can be delayed until you no longer live in the home you use as loan collateral.)
With the typical monthly mortgage payment topping $1,800, according to Zillow, ditching your mortgage payments could be a significant boon to your overall financial picture.
2. Pay off other debts
Mortgages aren’t the only type of debt older Americans are bringing into retirement. The number of adults age 60 or older with student loan debt has grown rapidly in the past two decades, with more than three million older adults today holding $125 billion in student debt, according to the National Consumer Law Center.
Auto loans are also common: Baby boomers held an average car loan balance of $21,600 last year, up 8% from two years prior, according to Experian.
And of course, credit cards are a pain point for Americans at all ages. Credit card debt has soared in particular among members of Generation X, the oldest of which turn 60 next year. The average credit card debt held by Gen Xers is up 36% from a decade ago, Experian reports.
When you consider that the average annual percentage rate (APR) on credit cards has nearly doubled from 12.9% in late 2013 to 22.8% in 2023 — the highest level since the Federal Reserve Bank of New York started gathering this data — you can see how borrowing money can take a significant chunk out of your budget.
As financial advisors will tell you, not all debt is bad debt. But if you have high-interest debt, it may be wise to put the reverse mortgage proceeds toward paying it down.
3. Boost your cash flow in retirement
Decades ago, many Americans could rely on cash from a combination of pensions, Social Security and a small sum of savings to help them make ends meet during their later years in life. But with pensions going the wayside, the cost of living continuing to rise and people living longer than ever, that’s not necessarily the case anymore. Even retirees who don’t have a mortgage or other debts often stress over paying their bills.
While it’s important to consider all your options and make sure a reverse mortgage makes sense for you, these loans can unlock extra cash to fill in funding gaps during your golden years. In 2021, for example, the Journal of Financial Planning published a study that found that including home equity in a retirement investment portfolio can allow retirees to skip withdrawals during volatile markets — and that can greatly increase how long your money will last.
4. Delay your Social Security earnings
Roughly 68 million Americans a month receive Social Security benefits from the government, and for many people, these payments are a mainstay in their retirement income plan. That’s why it’s important to strategically map out when you take your benefits.
You can start receiving Social Security as soon as you reach age 62. But you’ll only get your complete benefits if you reach what’s called the full retirement age. In other words: Delaying when you start claiming can increase your monthly check.
Let’s look at an example: If you were born in 1960 or later, the Social Security Administration determines your full retirement age to be 67. When you turn 67, let’s say your full monthly benefit is worth $1,000. But if you start taking your benefits at age 62, the amount you’ll be paid is reduced by 30%, meaning you’ll only get $700 a month for the remainder of your life (not counting an annual cost-of-living adjustment).
While there are growing concerns over when the pool of money for Social Security benefits will be depleted, keep in mind that changes that would reduce payments or push back the full retirement age would likely only affect younger adults. If you’re already close to retirement age, any potential changes to Social Security shouldn’t influence your plan for when you take your benefits.
In certain circumstances, it can make sense to tap a reverse mortgage to delay your benefit, increasing the amount of money you’ll ultimately get. Just make sure to speak with a financial advisor to make sure this move makes sense for you.