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How Do Reverse Mortgages Work? (Nuts And Bolts)





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Published on Aug 23, 2013 Mention reverse mortgages to a lot of seniors and their initial reaction is, "Eh, that's not for me." But you know what? There have been a lot of changes to reverse mortgages in recent years, and today's loans offer advantages to seniors of all income levels. How? Actually, there are two primary ways a reverse mortgage could benefit you and your overall bottom line, even if you have a comfortable income already:

First, if you take your reverse mortgage as a line of credit rather than a lump sum, you can draw on it as you need it, which can help you weather the ups and downs of the stock market. See, traditionally, retirees who depend on stock market returns to maintain their standards of living have really been at the mercy of the stock market. That's a risk that really came to light in recent years when the market tanked. And then tanked again. A lot of seniors found that the values of their portfolios had plummeted, and that left a lot of retirees scrambling for ways to make ends meet. Many were forced to sell off a big share of their portfolios, and that meant that when the market recovered, the retirees had much smaller portfolios to provide an income stream. When stock prices bottomed out a few years ago, some retirees had to liquidate their entire portfolios just to stay afloat. Having a reverse mortgage line of credit would have allowed many seniors to weather that down market without having to dump their stocks.

The second main advantage: Lower tax bills. Using a reverse mortgage to pay off an existing traditional mortgage can be a better choice than paying a mortgage with, say, withdrawals from a 401K. Why? Distributions from the 401K are taxable, and they can be counted as income that can bump you into a higher tax bracket.

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