It is generally well known that beginning Social Security income payments prior to full retirement age results in a lower monthly benefit. The penalty seems stiff: a permanent 30 percent reduction in payments if you start receiving checks as early as the law allows. That means someone who would be entitled to $1,000 per month at age 67 would get only $700 each month for life if they chose to start at 62.
Meanwhile, an interesting and potentially powerful borrowing tool has entered the mainstream: the reverse mortgage. Used properly and judiciously, this product can be a godsend for retirees with equity in their homes who need to unlock funds without taking out a traditional mortgage or selling their house.
So it was inevitable that someone would combine the two concepts and suggest a seemingly elegant solution: use the cash from a reverse mortgage to delay the onset of Social Security benefits until full retirement age.
So, is this really a good idea? Sorry to disappoint, but probably not. Given the uncertainties involved and the costs of a reverse mortgage, the potential gain is limited at best and depends upon beating the odds of the life expectancy tables. Even then, the marginal advantage is probably not worth the effort.
A reverse mortgage can be an excellent device for transforming equity locked up in a home to use for monthly expenses, repairs and maintenance, even paying off existing debt. Of course, like any type of loan, borrowers must understand the product thoroughly and use it with care. But today’s government-guaranteed version known as the Home Equity Conversion Mortgage is safe, reputable and powerful when utilized appropriately.