The Problem
In today’s volatile economic environment, even well-prepared retirees are feeling anxious. Many investors now fear a prolonged downturn in the market and are tempted to reduce their market exposure. But they know that at least historically investors who stay in the market do better. As a result, articles appearing in respected journals are not necessarily recommending wholesale changes to portfolios but are cautioning investors to reduce spending.
I don’t like that advice, especially for homeowners over the age of 62 who want to continue enjoying retirement without cutting back on meaningful experiences like travel, lifetime gifts to children and grandchildren, and sponsoring treasured multigenerational family vacations. If you fall into that category and own your home outright or have only a modest mortgage remaining, there may be a potentially powerful solution available to you.
A Potential Solution You May Not Have Considered
One strategy worth examining is the thoughtful use of your home equity to support your cash flow needs. The equity in your home can be tapped tax-free to create a liquid reserve, provide a steady monthly income stream, or serve as a buffer during periods of market downturn. You can draw on it only when needed, or structure it to provide supplemental income without dipping into your investment portfolio. In essence, it allows you to utilize a portion of your home equity to support current or future spending in retirement.
This idea is not new, and it’s not fringe. Even the most aggressive variation of using the equity in your house for income―a reverse mortgage―is a $1.93 billion dollar market that is projected to grow to $3.2 billion dollars by 2033. In a prior Forbes article, Let Your Home Pay for Your Roth IRA Conversion, I explored how, in certain circumstances, home equity could be used to fund tax-saving strategies without increasing IRA withdrawals.
At first glance, these ideas might seem counterintuitive, especially to those of us who grew up believing that the ultimate financial milestone was owning your home free and clear. But in many cases, using your home as a financial safety valve may offer more freedom, flexibility, security, and peace of mind than you previously imagined.
Let’s look at how this works in practice.
Home Equity Line of Credit (HELOC)
You could take out a home equity line of credit. A HELOC gives you access to tax-free funds if the need arises in the future. If the market goes down and you want to avoid drawing from your portfolio, you can borrow from your HELOC to cover living expenses temporarily. Applying for a HELOC can be a relatively low-cost and noncommittal transaction. Of course, once you draw from it, you must begin making payments. These typically start as interest-only and later include both principal and interest.
Reverse Mortgage
Another strategy, one that often receives more skepticism, is taking out a reverse mortgage. But before we evaluate the pros and cons, let’s start with a couple of real-world examples with identifying details changed to preserve confidentiality.
Two Reverse Mortgage Successes
One of my clients got a reverse mortgage that has paid him $2,000/month for over 20 years and he will continue to receive that payment for the rest of his life. That monthly income allows him to stay in the home he loves and fund the lifestyle he enjoys.
Let’s say he lives another 10 years and dies in his home. He will have spent an additional $540,000 during his retirement, and when the house is sold, the loan is satisfied, and the remaining equity will be distributed to his estate. The estate will be smaller, but the income gave him the freedom to enjoy his life and help out his kids while they were younger.
Another client, recently widowed, lived in a high-maintenance condominium that she loved. After her husband’s prolonged expensive illness, her savings were no longer sufficient to cover taxes, insurance, condo fees, and other living expenses. A reverse mortgage allowed her to stay in her home and live comfortably, even if she lives beyond age 100.
Before I go any further, let me be clear: a reverse mortgage is not the right move for everyone. But for some retirees—particularly those seeking additional monthly income or access to liquidity without tapping investment accounts—it might be a powerful tool. At the very least, understanding how reverse mortgages work can provide peace of mind just knowing that a back-up option exists.
So, what might this actually look like? Let’s walk through a couple of realistic examples, using current numbers.
Scenario 1: A Couple, Both Age 70, with a $1 Million Paid-Off Home
A married couple, both 70, own their home outright and want to supplement their monthly income by about $2,000 without drawing down their IRA or brokerage accounts.
Here is what a reverse mortgage could provide based on current conditions:
- Monthly payout: $2,389 for the life of the surviving spouse
- Alternative option: $375,000 line of credit (LOC)
- Upfront closing costs: approximately $33,700 (can be financed)
- LOC growth if unused:
- Year 5: $522,000
- Year 10: $726,500
- Year 15: Just over $1 million
Even if the loan balance grows significantly over time due to compounding interest, any remaining equity after the home is sold belongs to the couple or their estate. And thanks to FHA insurance, if the home sells for less than the loan balance, the estate and heirs are not responsible for the shortfall.
Scenario 2: A Couple, Both Age 80, with a $1 Million Paid-Off Home
At age 80, a couple would qualify for more favorable terms because reverse mortgage payouts increase with age:
- Monthly payout: $3,356 for the life of the surviving spouse
- Alternative option: $448,000 LOC
- Upfront closing costs: roughly $33,700 (can be financed)
As in the earlier scenario, an unused LOC will continue to grow, providing a flexible and inflation-resistant source of funds.
A Note if Your House Isn’t Worth $1 Million
Reverse mortgages aren’t just for million-dollar homes. A fully paid-off home worth $440,000 would support a $1,000 per month payment for life under current assumptions.
What if it Passes the Math Test but Flunks the Stomach Test?
For a financial strategy to “work,” it must pass both the math and the stomach test. Our office ‘ran the numbers,’ and the analysis supported a strong return from the home equity strategy. But the wife wasn’t comfortable with the idea. They worked and sacrificed for 30 years to get their mortgage paid off. That was the end of the discussion.
Why Pay the Cost if You Don’t Plan to Use it Right Away?
Two CPAs I work closely with reviewed this article before publication. They agreed that the strategy makes sense in the scenarios presented and saw the potential value of using a reverse mortgage under other appropriate conditions as well. Their main caution was cost: the upfront fee of roughly $33,700 is significant. If the line of credit or income stream is never used, the benefit may not justify the expense. That said, when integrated thoughtfully into a long-term cash flow plan, especially as a hedge against market volatility, the strategy can offer real advantages.
There are several reasons. You are essentially locking in access to a tax-free source of funds that grows over time and does not require repayment as long as you remain in the house. The loan amount or income stream can increase, even if housing prices stagnate. The LOC can serve as an emergency reserve or supplement your income at a time when other buckets (like stocks) are temporarily down. And the closing costs can be financed.
Key Advantages of Reverse Mortgages
- No monthly payments required
- Proceeds are not taxable income
- You retain ownership and enjoyment of living in your home
- Guaranteed ability to remain in your home for life (provided property taxes and insurance are paid)
- Flexibility to access funds via monthly payment, lump sum, or growing LOC
Important Caveats
- If you expect to move or downsize within five years, the math may not be justified, as the upfront costs will likely outweigh the benefits.
- If your highest priority is leaving the largest possible estate, this may not be the best fit.
- Not all properties (especially condos) are FHA-approved.
- The FHA lending limit currently caps eligible home value at $1.2 million in Pennsylvania.
- You must qualify based on income, credit, and other factors.
Finding the Right Fit
Not all reverse mortgages are created equal. As with anything, costs, interest rates, and terms vary widely among lenders. The difference can significantly impact how much you can borrow and how much equity is eventually retained by you or by your heirs. Comparison shopping is essential.
For illustrative purposes, the rate assumptions and loan calculations in this article were based on information provided by Craig Schweiger, a reverse mortgage specialist familiar with FHA-backed HECM structures. I do not receive compensation for referring readers to Craig or any other provider.
Using the equity in your home to finance additional spending could be a valuable option for many retirees interested in protecting their portfolios while preserving their lifestyle. Even if you never use a HELOC or reverse mortgage, knowing they’re available can boost your confidence and reduce the pressure to sell investments at the wrong time.
Disclosure: The views expressed are those of the author and do not necessarily reflect the views of Forbes. This article is for informational purposes only and should not be construed as legal, tax, or financial advice. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful, or that markets will recover or react as they have in the past. Please consult your own advisors before making any financial decisions.
Read the full article here
