Headlines of the past might have led one to believe that reverse mortgages were best used as a last-ditch effort to avoid financial distress.
But many of today’s financial planners* say quite the opposite: Reverse mortgages can be beneficial for those who are financially savvy and are well-prepared for retirement.
“Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed. Reverse mortgages have transitioned from a last resort to a retirement income tool that can be incorporated as part of an overall efficient retirement income plan,” according to Wade Pfau, Professor @The American College; Principal @ McLean Asset Management in this Forbes article.*
For starters, today’s HECM (Home Equity Conversion Mortgage), an FHA-insured reverse mortgage, has gone through a lot of changes. In the last several years, the Department of Housing and Urban Development has implemented product changes to make reverse mortgages safer for consumers. A few of the ways reverse mortgages have changed:
- Today, there is a limit on the amount that can be withdrawn upfront which has led more people to take their reverse mortgage as a line of credit.
- There are updated non-borrowing spouse protections that give new rights to spouses who are not on the home title but who live in the home.
- Borrowers today must go through a detailed financial assessment to determine whether they are willing and able to meet their financial obligations and to comply with the mortgage requirements.** For borrowers who do not demonstrate their willingness to meet their loan obligations, life expectancy set-asides—full or partial—will be required.
The updates to the program have led to renewed interest among financial planners who once shied away from reverse mortgages. Your Finance of American Reverse Mortgage Professional can explain the details of each of these changes.
A Reverse Mortgage Can be a First Choice
Rather than a final option, a reverse mortgage can be a first choice to provide the following:
Safety net. A reverse mortgage line of credit can provide a safety net for households that are well prepared, but may not have planned for unforeseen events such as health care events or home improvements that are needed. Maybe your monthly cash flow is stable, but you haven’t prepared for medical bills that may arise. For eligible homeowners, a reverse mortgage is there if, and when, you need it.
HELOC alternative. A Home Equity Line of Credit is a competitive product, but comes with some limitations that the HECM LOC does not. With a HELOC, the lender can freeze or change the line of credit for various reasons. During the recent recession, for example, many HELOCs were frozen due to borrowers experiencing a change in their financial situation, or substantial loss of home value.
With a HECM Line of Credit, the lender can’t freeze loan draws after the loan has closed on the basis of borrower credit or property value decrease. The credit line stays open and available when needed as long as all loan terms are met** and the borrower continues to live in the home as a primary residence.
Financial planning tool. Several renowned financial planners have published research that shows tapping into home equity via a reverse mortgage line of credit can help protect investments in the long term. The unused funds in a reverse mortgage LOC actually grow over time, providing more borrowing power the longer the reverse mortgage is unused. Financially savvy investors can draw on home equity when investments are growing to allow for the maximum benefit of the overall portfolio.
Today’s reverse mortgage can offer an opportunity for many older homeowners who are looking to maximize their retirement outlook. If you would like to know more about how a reverse mortgage fits into your financial plan, contact a reverse mortgage professional at Finance of America Reverse.
*Wade Pfau, Professor @ The American College; Principal @ McLean Asset Management; Using Reverse Mortgages in a Responsible Retirement Income Plan; FEB 21, 2017 @ 11:58 AM; fORBES, Retirement/ #RetireWell. https://www.forbes.com/sites/wadepfau/2017/02/21/using-reverse-mortgages-in-a-responsible-retirement-income-plan/#19e8129735e5
**If the borrower does not meet loan obligations such as payment of property taxes, fees, hazard insurance and maintaining the home, then the loan will need to be repaid. The home must be the primary residence.