It’s common for retirees seeking to secure their financial future to encounter significant risks. Typical concerns include paying for long-term care, managing cash flow, and accessing equity to supplement income or cover expenses. A Home Equity Conversion Mortgage (HECM) reverse mortgage is a powerful tool that may help retirees address these challenges effectively without negatively impacting their cash flow. Here’s how a HECM reverse mortgage could solve three major retirement problems:

1. Paying for Long-Term Care: A Flexible Alternative to Insurance

LawforSeniors.org notes, “Premiums for LTCI are relatively high.  The average premium is $3,000 to $6,000 per year, depending on age, sex, health, the maximum daily benefit, the benefit period, and the elimination period (or how long the policyholder must wait before benefits are paid)”. Furthermore, premiums are not fixed and increase over time.

Additionally, retirees may be unable to qualify for LTCI due to health conditions or age. This is where an FHA HECM reverse mortgage provides a unique solution. 

By tapping into their housing wealth older homeowners can use the proceeds from a reverse mortgage to cover LTC expenses as they arise. Here’s how:

Directly pay for care: Instead of paying premiums for LTCI, retirees could draw from their HECM line of credit to fund home healthcare, assisted living, or nursing home care. This offers flexibility, allowing retirees to only pay for care when needed, avoiding ongoing insurance premiums that may not provide immediate value.

Redirected Payments: Also, homeowners with significant mortgage payments could leverage their extra cash flow by eliminating their required mortgage and applying those former payments to an account earmarked for future long-term care expenses.

Fund LTCI premiums: For those who prefer to obtain or continue LTCI coverage, reverse mortgage proceeds can also be used to pay for insurance premiums. This removes the strain on monthly income, helping retirees maintain their LTCI policy and mitigating the impact on their retirement budget.

In both cases, a reverse mortgage allows retirees to access their home equity without selling the home, offering peace of mind that long-term care needs can be addressed without depleting savings or cutting into other retirement resources.

2. Using a Reverse Mortgage Line of Credit vs. a Traditional HELOC

Many retirees use a Home Equity Line of Credit (HELOC) to access funds during retirement. However, HELOCs come with several drawbacks, including required monthly payments and the potential for lenders to freeze or reduce the credit line. In addition, HELOC payments increase after the draw period at which point the outstanding balance is fully amortized.

A HECM reverse mortgage line of credit, on the other hand, offers several advantages over a traditional HELOC:

• No monthly payments: Unlike a HELOC, a reverse mortgage line of credit does not require monthly principal or interest payments. This can significantly reduce financial pressure on retirees who may be living on a fixed income.
• Guaranteed access: While a HELOC can be frozen or reduced by the lender during times of economic uncertainty, the line of credit in a reverse mortgage is guaranteed to be available as long as the borrower meets the loan terms (e.g., paying property taxes and homeowners insurance). This provides a reliable source of funds, even in challenging economic climates.
• Growth over time: One unique feature of the reverse mortgage line of credit is that the available balance can grow over time, based on the loan’s interest rate. This means retirees may have access to more funds in the future, offering additional financial flexibility. For example, a borrower with an unused $200,000 HECM line of credit with an average growth rate of 6% would have access to $267,000 in five years and an astounding $358,000 in ten years. The credit line could be used for several purposes including long-term care expenses.

By choosing a reverse mortgage line of credit instead of a HELOC, retirees can secure a stable, flexible source of funds without the burden of monthly payments or the risk of losing access to their credit line*.

3. Creating Additional Monthly Cash Flow

For retirees facing a cash flow shortfall, a reverse mortgage can serve as an effective solution to supplement their income. The HECM reverse mortgage offers several payout options that can provide retirees with additional monthly cash flow:

Monthly tenure payments: Retirees can opt for monthly payments from the reverse mortgage, which will continue as long as they live in the home. This option effectively turns housing wealth into a steady source of cash flow, reducing the need to draw down other assets like savings or investments. Tenure payments may be ideal for borrowers who are prone to overspending or have a history of poor money management.

Term payments: For those who need additional cash flow for a specific period (e.g., during the early years of retirement), reverse mortgage term payments offer a fixed monthly amount for a set number of years. This can provide a reliable stream of cash flow during a time when expenses may be higher or other income sources are still developing.

The Hybrid Plan: Retirees can also combine a monthly payment option with a line of credit, allowing them to access additional funds as needed while receiving a predictable monthly payout. This flexibility enables retirees to tailor their reverse mortgage to their unique financial situation.

Closing Thoughts

Understanding your potential borrower’s financial situation is key to uncovering these three common retirement pitfalls. Knowing this reverse mortgage professionals can then focus on providing solutions that build value instead of merely ‘selling’ a loan.

Whether covering long-term care expenses, replacing a traditional HELOC, or creating additional monthly cash flow, a reverse mortgage offers flexibility and security.