Reverse mortgage proceeds can offer retirees a sense of control and ownership of their financial portfolio and retirement strategy. Because there are no restrictions on how a borrower uses the funds, there are many ways borrowers can leverage them to improve their financial position and create safeguards for the future. Here are six smart ways to use reverse mortgage proceeds.
1. Fight Inflation
Many people on fixed incomes may find their budgets strained by inflation. Eliminating a monthly mortgage payment with a reverse mortgage can give tight budgets some breathing room. Instead of tapping investments to make ends meet, reverse mortgage funds can offer an alternative for closing a budget gap. The borrower can get the cash they need in the near term and allow their investments to continue growing.
Even if they don’t have a current need, a homeowner with substantial equity in their home can capitalize on high property values by opening a reverse line of credit. This line of credit has a unique feature. The homeowner’s borrowing power grows over time. Opening the line of credit while the housing market is high allows borrowers to maximize their potential borrowing power in the future.
2. See the Impact of Your Legacy in Your Lifetime
Reverse mortgage proceeds can provide an opportunity to see the impact of your legacy during your lifetime. Instead of leaving these funds to their heirs in their will, borrowers can use these proceeds to help their loved ones now. Many use reverse mortgage proceeds to help their children and grandchildren pay for college.
Others use them to pay for a memorable bucket list family vacation. Watching and participating in the impact of your legacy can be a rewarding experience both everyone. Before choosing to use reverse mortgage proceeds for a legacy gift, make sure you will have sufficient funds for your own retirement. A financial planner can advise on what’s feasible.
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3. Pay Down High-Interest Debts
If you carry credit card debt or high-interest loans, reverse mortgage proceeds can help you get out of unsecured debt, costing you interest and eating into your monthly budget. The balance will transfer to your reverse mortgage, but it won’t be due until the loan matures. Without high monthly payments, you’ll benefit from an increased monthly cash flow without the constant stress of multiple payments.
If you are thinking about debt consolidation, you might want to first consult a non-profit credit counselor.
4. Use the Money for a Roth IRA Conversion
Converting a traditional IRA to a Roth IRA is a strategy people use to let their retirement savings grow tax-free. While distributions from traditional IRAs are subject to income tax, distributions from ROTH IRAs are not. The conversion will mean a large, one-time tax bill, but after paying that, distributions from the IRA will not be taxed. Using proceeds from a reverse mortgage to pay for the conversion means you won’t need to tap other investments or savings to cover the conversion.
5. Create an Emergency Fund
Emergencies will inevitably arise, and having a financial strategy to address these concerns before they happen can give you peace of mind. Many reverse mortgage borrowers reserve their proceeds for a rainy day—whether that means an unexpected home repair, medical expense, or just-in-case funds to address financial emergencies.
6. Build an Accessory Dwelling Unit (ADU)
ADUs, also called casitas, granny flats, in-law apartments, and backyard cottages, offer a potential avenue for generating rental income in retirement. Borrowers looking to increase monthly cash flow with a rental may consider using their reverse mortgage proceeds to build an ADU. To be eligible for a reverse mortgage, borrowers must live on the property. In most cases, the ADU will also increase the value of the main property.
There are many smart ways to use reverse mortgage proceeds. Speaking with a financial advisor about what’s best for your situation is always a good idea.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.