For retirees on a fixed income, recent federal interest rate hikes and inflation are valid causes for concern. The Bureau of Labor Statistics reported in June 2022 that inflation in the United States was a whopping 9.1%, the highest in four decades. Since then, inflation has come down but remains stubbornly high. This has been devastating for many retirees who are stretching to meet day-to-day expenses and trying to avoid tapping investments while the market is down. However, for homeowners with substantial home equity, a reverse mortgage may offer a silver lining in these economically uncertain times.
Here’s how eligible homeowners can leverage a reverse mortgage to fight inflation.
Increase Cash Flow to Combat Tight Budgets
People on fixed incomes often feel the pinch when living costs go up. Many retirees return to the workforce to supplement their incomes. Others try to make do by trimming expenses. Removing a sizeable line item like a mortgage payment may be all that’s needed to give tight budgets some breathing room.
Because taking a reverse mortgage eliminates required monthly mortgage payments, reverse mortgage borrowers on a fixed income can increase their cash flow without adding an additional source of income or tapping into investments.
Pay Off and Avoid Taking on High-interest Debt
Another way a reverse mortgage can increase cash flow is by providing an avenue for paying off high-interest debt like credit cards. Though reverse mortgage debt does accrue interest, this interest is added to the loan balance and is not required to be paid off until the loan comes due.
Even people without existing high-interest debt often find themselves in need of extra cash. In a high-inflation climate, favorable options are limited. Instead of putting big expenses on a credit card or other vehicle requiring immediate monthly payments, a reverse mortgage can offer an infusion of cash that won’t further burden stretched budgets.
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Get More Cash Without a Higher Tax Bill
Because the Internal Revenue Service (IRS) considers reverse mortgage proceeds a loan, they will not be taxed as income. Borrowers can tap their equity and use it for anything they like without feeling the impact on their income taxes.
Leave Investments in the Market Where They Can Grow
In a climate of stock market instability, it’s usually not wise to sell assets. While many retirees rely on cashing in investments periodically to fund living expenses, it’s often advisable to leave them alone when markets are down.
A reverse mortgage can provide another source of retirement funds which means people aren’t forced to sell assets at an unacceptably low price or at a loss. Later, when the market rebounds and inflation subsides, it may become advantageous to cash out investment funds to repay the mortgage, which borrowers are free to do at any time.
Give Your Budget Breathing Room With a Line of Credit
Even retirees who don’t have an immediate need can give themselves future flexibility for paying unexpected or wish list expenses with a reverse line of credit. As part of a reverse mortgage payout, the amount of fund availability through the line of credit is determined by the home’s equity. A reverse line of credit also has some unique features that make it especially advantageous, like the potential to grow over time to extend more borrowing power, even if the home’s value drops. Taking out a reverse line of credit while property values are historically high allows retirees to maximize their future borrowing potential and give themselves peace of mind in the present.
Think Big
A reverse mortgage can open possibilities in a climate where many feel they need to hunker down and cut back. Here are just a few ways to use a reverse mortgage to fight inflation:
- Help grandchildren avoid taking student loans. Instead of leaving a legacy in your will, consider using a reverse mortgage now to help grandchildren and young relatives get an education without the burden of debt.
- Fund Roth IRA conversion. Decrease future tax exposure by converting your IRAs into Roth IRAs.
- Take an extended international vacation. Inflation is even higher in other parts of the world. Take advantage of the strong dollar and spend time in another country with significant savings.
During times of market volatility and economic uncertainty, a reverse mortgage can be a powerful tool that puts more options on the table.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
