Understanding Reverse Mortgages

By Brent Meyer — SafeMoney.com Founder & Editor Reviewed by Licensed Financial Professionals  |  SafeMoney.com — Trusted Since 2011  |  Updated Regularly Quick Answer: Explore reverse mortgages as a safe money alternative for retirement planning. Learn how they can enhance your financial strategy today. Once, reverse mortgages were considered to be the financial stepchild of retirement income sources. But respected authorities like  Wade Pfau  have shed new light on its potential uses in a retirement strategy. Now, growing shares of financial professionals, retirees, and other Americans see their benefits for certain situations. If you have any pre-conceived notions about reverse mortgages, you might have formed them while watching those TV commercials with Tom Selleck, Robert Wagner, Henry Winkler, or one of many other well-known personalities. You might ask, “What roles might a reverse mortgage play in my retirement income plan ?” That is a good question. Let’s take a look at some potential uses for a reverse mortgage, including what it may involve. Reverse Mortgages 101 A reverse mortgage is a form of home equity loan for homeowners age 62 or older. They receive monthly payments from their lender based on a percentage of their accumulated home equity. This essentially turns an illiquid asset, their home, into a liquid asset, retirement income. They do not have to make monthly payments on the reverse mortgage and the loan accrues interest and is repaid at one of two occurrences: 1) when the borrower sells the home and moves, or 2) when the borrower passes away. Essentially a reverse mortgage allows a borrower to leverage the value of their home, built up over time, to create a potentially lifelong income stream. The reverse mortgage can be used to pay off an existing mortgage, freeing up income that would have been used to make those monthly payments. A Changing Landscape for Reverse Mortgages? According to well-known retirement planning expert Wade Pfau, Ph.D., CFA, “Though reverse mortgages have long held a bad reputation, research and public policy in recent years are shedding new light on their potential uses in retirement.” Writing on RetirementResearcher.com he adds, “Reverse mortgages have transitioned from a last resort to a retirement income tool that can be incorporated as part of an overall efficient retirement income plan.” In addition to being at least age 6