How To Use Your Home To Get More Income

A reverse mortgage can provide retirees with financial flexibility and security.

- Patricia Mertz Esswein

Many homeowners in or near retirement face a quandary. Their wealth is tied up in their home— two-thirds of the average retiree’s net worth is home equity—yet they’d rather not tap that wealth by selling their house and downsizing.

One versatile solution is a reverse mortgage. It lets you stay put, ditch your mortgage payment (if you still have one) and tap your home equity. The money you borrow can be used however you like—to supplement retirement income, to renovate your home or to cover health care costs, for example. Divorcing spouses can use a reverse mortgage to, say, help one spouse keep the house and the other buy a home. With a reverse mortgage “for purchase,” you can even buy a retirement home. The loan comes due when the last surviving borrower dies, sells the home or leaves for more than 12 months due to illness. You’ll never owe more than the value of your home when you or your heirs sell it to repay the reverse mortgage.

The National Reverse Mortgage Lenders Association figures that only about 3% of eligible borrowers have one. Many financial advisers and consumers continue to think of reverse mortgages as loans of last resort. But some potentially detrimental features have been corrected. And over the past several years, financial researchers have found that a reverse mortgage taken as a credit line early in retirement can grow, providing steady income or buffering financial shocks, even for well-heeled borrowers. For example, tapping a line of credit could allow you to avoid taking a distribution from your investment portfolio when it has lost value, or it could cover the cost of long-term care, says Wade Pfau, director of retirement research at McLean Asset Management, in McLean, Va.