Laurie MacNaughton © 2020
In years past homeowners routinely turned to traditional equity lines to cover unexpected expenses. However, tightened credit qualifications have put this option out of reach for many older homeowners. Additionally, a traditional line of credit requires homeowners to make a monthly mortgage payment once they withdraw funds – and, in accordance with the terms of many lines of credit, the more funds withdrawn, the higher the monthly mortgage payment becomes.
It’s not new news that a reverse mortgage can serve as safety net during times of financial turbulence. In fact, longstanding research demonstrates that a reverse mortgage can relieve unsustainable drawdowns when retirement funds are under pressure. Some experts actually call a reverse mortgage a “buffer asset” due to the significant role it can play in wealth preservation.
Here are three advantages a reverse mortgage can hold over a traditional line of credit:
The first is that a reverse mortgage is a home equity loan. I could pretty much stop there and you would know more than most. However, it’s an equity loan with a few unique features. Most obviously, a reverse mortgage is not repaid on a monthly basis. Rather, it’s repaid on the back-end, in reverse, once the home is sold. Just like with any other home sale, after the loan is repaid all remaining equity belongs to the homeowner or the heirs.
Second, a reverse mortgage line of credit cannot be called due, canceled, or frozen the way a HELOC can be. A reverse mortgage line of credit is established at the time of closing and it’s there for the homeowners’ use regardless of market conditions. This makes it a powerful hedge against economic turmoil, as the value of the credit line does not decrease even if housing values fall.
Third, the unused balance in a reverse mortgage line of credit actually grows larger over time. This little-known attribute can add significantly to the amount available in the line of credit.
The takeaway is this: a reverse mortgage can lessen pressure on investments and create an asset source outside the investment portfolio. This may give other assets time to recover lost value as markets stabilize.
If you would like to discuss how a reverse mortgage might benefit you or one you love, give me a call. I always love hearing from you.