Ask U.S. retirees what worries them most -- as a recent survey by the American Institute of CPAs just did -- and "running out of money" is the answer that will most likely top their lists.
But homeowners over 62 who have substantial equity in their properties have an extra tool at their disposal that can minimize that anxiety. A reverse mortgage will allow them to extract that equity by delivering funds that could keep them calm and out of financial trouble. But could the payments from a reverse mortgage slice into Social Security or Medicare benefits?
Reverse mortgage basics
Reverse mortgages, otherwise known as home equity conversion mortgages (HECM), were created in 1980 as a product designed to help seniors stay solvent while remaining in their homes.
With a regular mortgage, you pay the bank monthly installments. With a reverse mortgage, the bank pays you -- a nice change of pace and cash flow. You withdraw money against the equity in your home, and the loan doesn't come due until you sell the home, move out of it, or die.
The amount you're eligible to receive is based on a formula that takes into account your age, the equity in your home, its market value, and the interest rate you'll be paying. You can take the reverse mortgage funds as a lump sum, a monthly payment, or a line of credit.
There are some notable downsides to this type of loan, however: It often carries substantial fees, including origination fees, closing costs (similar to a regular mortgage), and mortgage insurance premiums. All these can generally be rolled right into the loan -- which means you'll pay little or no money out of your own pocket at the beginning. Ultimately, though, this will increase the amount of money the bank is entitled to receive once the loan is terminated.
Who should consider a reverse mortgage?
These types of lending instruments aren't right for everyone. First, if you're hoping to leave your home to your heirs, a reverse mortgage may be a poor choice. If your family's plan is to keep the house, they can do so by paying off the balance of your HECM once you die or move out -- but that could be an expensive proposition. Similarly, if you're expecting them to sell it (perhaps to simplify the splitting up of that inheritance), the share your heirs will receive from the proceeds may not be as much as you'd intended.
Second, if you're struggling just to keep up with the day-to-day costs of running the house, a reverse mortgage may not be the best idea. If you don't keep up with your taxes and home maintenance, the bank has the option to call the loan. But if you're simply looking to supplement your retirement income for peace of mind, it's a reasonable financial planning tool to investigate.
Will a reverse mortgage impact Social Security benefits?
Once you receive a reverse mortgage, you'll have more money at your disposal. But the good news is that it has no bearing on your Social Security benefits. Social Security is a "non-means-tested program" -- in other words, the amount of income you bring in will not impact your monthly benefit once you file. And though it might feel like income when you use it to pay your bills, technically, it's not. So you don't need to take Social Security into consideration when you're considering this type of loan.
Will a reverse mortgage impact Medicare benefits?
Medicare, too, is a non-means-tested government program, so you can rest assured that your benefits will not change. However, a reverse mortgage can have an effect on Medicaid and Supplemental Security Income (SSI) benefits, because those are based on your current financial assets.
If you're receiving either of those, it's best to speak to an elder law attorney or estate planning attorney to discuss how a reverse mortgage might affect your specific situation. If you take your reverse mortgage money as a line of credit, it generally won't have an impact, because those are not counted as liquid assets. But seeking professional advice is recommended if you're contemplating the possibility of going on Medicaid.
Retirement is supposed to be a time to relax and enjoy the fruits of your years of labor. But if you're constantly worrying that your money might not last as long as you do, your senior years may be fraught with anxiety instead of joy. A reverse mortgage can help take some of that pressure off, and enable you to enjoy your life without worrying about who's going to pay for it.