Retirees don’t want to run out of money. However, homeowners over 62 who have considerable equity in their homes may want to look at a strategy that can minimize their money anxiety. A reverse mortgage will let them tap into home equity, by providing funds to keep them financially stable. Could the reverse mortgage payments take a bite out of their Social Security or Medicare benefits?
Motley Fool’s recent article asks, “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?” The article explains that reverse mortgages, also called home equity conversion mortgages (HECM), were created in 1980 to help seniors stay solvent, while remaining in their homes.
You know that in a regular mortgage, you pay the bank monthly installments. However, with a reverse mortgage, the bank pays you. You take out 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 can get 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 get your reverse mortgage funds as a lump sum, a monthly payment, or a line of credit.
There are some drawbacks to a reverse mortgage. This type of loan can have big fees, including origination fees, closing costs (similar to a regular mortgage) and mortgage insurance premiums. These fees can usually be rolled into the loan. It will, however, increase the amount the bank is entitled to receive once the loan ends.
A reverse mortgage isn’t for you, if you want to leave your home to your family. Perhaps they can pay off the balance of your HECM once you die or move out, but that could be costly. If you want 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 anticipated. If you’re having a hard time keeping up with the day-to-day costs of running the house, a reverse mortgage may not be the best option. However, if you’re just looking to add to your retirement income for peace of mind, it’s a decent financial planning tool to consider.
The good news is that it has no impact on your Social Security benefits, because the program is not means-tested. Therefore, the amount of income you have won’t affect your monthly benefit when you file. As a result, you don’t need to take Social Security into account when you’re thinking about this type of loan.
Likewise, Medicare is a non-means-tested program. However, a reverse mortgage can have an impact on Medicaid and Supplemental Security Income (SSI) benefits, because those are based on your current financial assets. If you’re receiving either of those, talk to an elder law attorney or estate planning attorney to discuss how a reverse mortgage might have an effect on your specific circumstances.
Reference: Motley Fool (November 1, 2019) “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?”