Reverse mortgages have often been branded as a way for older retirees to raise money only when other sources of retirement income have dried up.
But a growing group of financial planners and academics say that taking out a reverse mortgage early in retirement could help protect your retirement income from stock market volatility and significantly reduce the risk that you'll run out of money.
Here's how the strategy works: Take out a reverse mortgage line of credit as early as possible -- homeowners are eligible at age 62 -- and set it aside. If the stock market turns bearish, draw from the line of credit to pay expenses until your portfolio recovers.
A traditional home-equity line of credit could also provide a source of emergency cash, but you can't count on the money being there when you need it, says Shelley Giordano, of the University of Illinois at Urbana Champaign.
During the 2008-09 market downturn and credit crunch, many banks froze or closed borrowers' home-equity lines.
"Just when people needed money and liquidity, the banks needed liquidity, too," says Giordano. That won't happen if you have a reverse mortgage line of credit. As long as you meet the terms of the reverse mortgage -- you must maintain your home and pay taxes and insurance -- your line of credit is guaranteed.
Several factors make a standby reverse mortgage particularly attractive now. Homeowners ages 62 and older have seen the amount of equity in their homes increase sharply in recent years, to a record $7.14 trillion in the first quarter of 2019, according to the National Reverse Mortgage Lenders Association.
Low interest rates are another plus. Under the terms of the government-insured Home Equity Conversion Mortgage, the most popular kind of reverse mortgage, the lower the interest rate, the more home equity you're allowed to borrow.
Which leads us to one of the most counterintuitive -- and potentially lucrative -- features of reverse mortgages. Your untapped credit line will increase as if you were paying interest on the balance, even though you don't have to pay interest on money you don't tap. If interest rates increase -- and given current low rates, they are almost guaranteed to move higher eventually -- your line of credit will grow even faster, says Giordano.
You won't have to pay back money you tap as long as you remain in your home. If you have an existing mortgage, you'll have to use the proceeds from your reverse mortgage to pay that off first.
One of the biggest downsides to reverse mortgages is the up-front cost, which is significantly higher than the cost of a traditional home-equity line of credit. Because of this, it's rarely a good idea to take out a reverse mortgage unless you expect to stay in your home for at least five years.
(Sandra Block is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to
. And for more information on this topic, visit
(c) 2019 Kiplinger's Personal Finance; Distributed by Tribune Content Agency, LLC.