Reverse mortgage information has recently improved in the financial world due to the apparent success of regulations that were put in place in 2013. The Reverse Mortgage Stabilization Act of 2013 has helped garner these financial options some newfound respect in the industry.
Safeguarding provisions established by the Act, such as a restriction on initial borrowing amount, can help protect seniors from withdrawing all of their equity from the very beginning of the loan by keeping approximately 40% of the total equity on reserve for at least a year after the initial disbursement. Seniors must also prove that they have the resources to pay taxes and insurance during the program, or the bank can provide an escrow option to guarantee the funds are available for such expenses.
Using a HECM Line of Credit to Generate Income
Financial advisers recommend establishing a Home Equity Conversion Mortgage (HECM) line of credit as a way to establish a financial cushion, even if a senior doesn’t need it right away. In certain cases, this makes more sense than withdrawing a lump sum; since the HECM line of credit will actually increase in cash value the longer it remains dormant.
Another important part of the reverse mortgage information that advisers recommend is using the HECM line of credit tactic. This will help protect retirement accounts from stock market fluctuations. This is possible because HECM withdrawals are tax-free. When the market is less favorable for drawing on investment accounts as a source of income. Seniors can simply draw against their HECM line of credit. This way, when the markets rebound, a senior’s retirement accounts don’t take much of a hit. When investment portfolios bounce back, the line of credit can then be repaid.
HECM line of credit payments can also provide a solution for seniors looking for a way to delay taking a hit on early social security payments. By waiting to access social security funds until later in retirement, retirees can ultimately expect an increase in the payment amounts when they are finally withdrawn.
Lump Sum: Paying Off a Forward Mortgage to Improve Cash Flow
Using the lump-sum proceeds from a reverse mortgage to pay off a forward mortgage is another strategy that financial planners recommend. This tactic frees up cash flow for living expenses by eliminating what is typically the largest household expense for many seniors.
However, advisers don’t recommend using the lump-sum payment as leverage for taking on other debt such as a down payment for a big-ticket item or a second home. This can lead to budget problems down the road. Not to mention decreasing the senior’s financial nest egg and overall borrowing power. The goal is to use the reverse mortgage lump sum payment in a conservative manner to decrease existing debt and free up cash flow.
Financial planners are considering the new reverse mortgage information to be promising due to the 2013 regulations that have taken effect. These unique loan options can be viewed as a fiscally responsible way for seniors to put their money to good use for a comfortable and secure retirement.