Reverse Mortgages: What Boomers Need to Consider

Baby Boomers are getting a bad rap. It seems like every day we are bombarded by negative articles and news stories about Boomers and money. We are told that Boomers haven’t saved enough. They need to get serious about retirement. Baby Boomers are simply not being responsible with their finances. It’s enough to give you a complex.

They’ve successfully managed plenty of important issues such as raising their kids, paying for college and taking care of their aging parents. Some families have faced even bigger challenges such as health, disability and death. Sometimes the best we can do is focus on the immediate problem and put everything else on hold. Hopefully, after the storm passes we can get back on track.

The Baby Boomer generation is approaching retirement. In fact, an average of 10,000 Boomers are turning 65 every day. And some are beginning to fear that there may not be enough time to bridge the gap between what they need and what they’ve saved. In fact, some Boomers are feeling like this gap is a chasm they might never overcome.

Reverse Mortgages As a Retirement Tool

Can a reverse mortgage save Boomer's retirement dreams? For most Americans, their home is their largest asset and a reverse mortgage is a way for home owners to tap into this equity. They feel that doing so could certainly provide extra cash flow. The way it works is that you borrow a portion of the equity in your home from a financial institution. You can receive this money as periodic payments, such as monthly or annually. If you prefer, you could take the payment all at once as a lump sum.

A reverse mortgage should not be confused with selling your house. You’ll still own your house after taking out a reverse mortgage and you will be able to continue living in it.

A reverse mortgage is considered a loan advance. As such, it is not treated as earned income. That means your payments will not be taxable and usually will not affect Social Security or Medicare. They are also structured in such a way that the balance of the loan does not have to be repaid until the borrower dies, sells the home, or permanently moves out.

To qualify for a reverse mortgage, you will need to be age 62 or older. In fact, everyone on the deed must be 62 or older. And the older you are, the more money you will receive. However, the payments will be based on the age of the youngest person on the deed.

Reasons to Be Cautious

Reverse mortgages are controversial. In 2004, the Financial Industry Regulatory Agency (FINRA) issued an investor alert titled, “Betting the Ranch: Risking Your Home to Buy Securities.” The alert was issued to caution investors, especially those living on a fixed income, that they could lose their homes if their investments went down and they weren’t able to pay their mortgages.

In May of 2014, FINRA issued another investor alert, "Reverse Mortgages: Avoiding a Reversal of Fortune." It urged home owners to carefully weigh all their options before entering into a reverse mortgage.

Other Considerations and Options

What else should you know? Before receiving a reverse mortgage, you will be required to attend some classes to learn more about them. This can be done through an independent third-party, or a national counseling agency such as AARP.

A reverse mortgage will diminish the value of your estate. This means you will be leaving a smaller inheritance to your loved ones because you would be spending down the equity in your home rather than leaving it to your children.

I have seen plenty of families improve their situations in other ways. Some have moved into smaller more economical homes. Others have found ways to reign in their budget. Maybe you could cut your household expenses?

If you do decide to explore a reverse mortgage, be sure to carefully weigh all the risks involved before making any investment decisions. (For more from this author see: How Speeding Can Destroy Your Retirement Dreams.)