HECMs (‘Reverse Mortgages’) have a mixed reputation: Expensive. Complex. Predatory. Depending on who you ask, the last (predatory product) no longer exists for reverse mortgages (aka Home Equity Conversion Mortgages).
However, just like anything else in personal finance (and life in general), educate yourself. Ask a lot of questions.
The Risk
Understand the risk if you indeed do want to remain in your home until your last days. Since an reverse mortgage requires the sale of the home if it ceases to be your primary residence, you cannot move back to it once you move out; you will have to sell it.
There are many moving parts to this product, so if it is one you explore now or in the future, learn as much as you can and get crystal clear on the role it plays in your retirement distribution strategy.
Also, just like any other type of home loan, it does have costs associated with it.
Reasons For A Reverse Mortgage
1. Your home is paid off and you have an incredible amount of equity in your home. By this I don’t mean multiples of 10,000. I mean multiples of 100,000. Unless you have a very specific legacy/estate wish to leave your home to one person or one entity, then why, if you are financially disciplined, are you not considering tapping this equity?
2. You want a distribution option to draw from when your portfolio may have experienced a setback for any given year (thus avoiding taking a portfolio distribution in a down year).
3. Your Estate Plan: Since a reverse mortgage requires your estate to sell your home when you pass away, your heirs cannot at all whatsoever hold onto your house.
This avoids the conflict that often happens between heirs: Some want to hold onto your house. Others want to sell it. This may not be an issue if you only have one heir of the house. It would be solely at their discretion to keep it or sell it.
But, if you have multiple heirs, taking out a reverse mortgage, even if you elect to never use it, avoids the conflict and fractured relationships that occur as a result of your heirs who want to keep vs. those that want to sell.
A reverse mortgage is an expedient way to solve the problem. Of course, if your estate plan clearly calls out that your home will go solely to one heir at their express wish, that may also solve the problem. But assuming you do not have an heir that has a wish to solely inherit your house, then a reverse mortgage goes a long way to distributing the proceeds conflict-free amongst your heirs.
Reverse Mortgages Are A Third Party
But having a reverse mortgage provides your heirs with an objective third party that negates needing to decide to keep or sell.
Should a reverse mortgage be taken out solely for the estate planning merits? That’s part of a larger conversation and one that would be highly dependent on other factors in your life (e.g. your retirement distribution strategies) and in your plans for your estate.
However, if a reverse mortgage is a product that already makes sense for your retirement, then this benefit to your estate plan likely makes it just that much more of a useful tool for you.
P.S. If you do take out a reverse mortgage, always make sure your heirs know that they will not be receiving 100% of the sale proceeds! This ensures they don’t have assumptions regarding the proceeds.
It also ensures they don’t have a poor opinion of reverse mortgages.
Ready to take the next step and work with a fee-only CFP? Reach out to schedule a Discovery Meeting to learn more.