Reverse mortgages have evolved since they were first introduced in 1961. Still, misconceptions persist about who they are for and who could benefit from this important financial tool.
Some people incorrectly believe that reverse mortgages only apply to people with no other options, but that is incorrect. While it’s true that, at one point in time, they were used as a loan of last resort by seniors unable to make ends meet, they have undergone substantial policy changes over the years. They are now important financial planning tools, and financial advisors are taking note.
How Have Reverse Mortgages Changed?
In 2014, the Federal Housing Administration (FHA) instituted program changes designed to reposition the Home Equity Conversion Mortgage (HECM). These changes made the loan less useful as a product of last resort and more appealing as a financial planning tool for those looking to bolster their finances in retirement.
New rules tightened underwriting standards for HECM loans, requiring lenders to evaluate a borrower’s credit history, income, and debt to determine if they are capable of meeting the obligations of the loan. Other legislation has also been enacted to protect borrowers.
What Is The Reverse Mortgage Stabilization Act of 2013?
The Reverse Mortgage Stabilization Act of 2013 prevents reverse mortgage borrowers from using too much equity too soon, helping to secure their financial position. It also protects spouses who are too young to be co-borrowers on the loan by ensuring they can remain in the house after the older spouse passes away.
These regulatory changes further solidify the concept of a “new reverse mortgage,” the one that industry leaders have been touting as a way to engage the public in a new conversation about the loan.
With these guidelines in place, reverse mortgages have taken on a new shape. They have revitalized the dialogue about how this financial tool can help seniors realize their retirement goals.
How Financial Advisers Have Responded to Reverse Mortgages
The evolution of reverse mortgages as financial planning tools has spurred an industry-wide goal to connect with financial advisors to reeducate them about reverse mortgages. As a result, they have been embraced by numerous financial experts.
Research published in The Journal of Financial Planning and articles in mainstream media outlets by well-respected authorities in retirement planning have detailed the ways this loan can be used strategically to bolster a senior’s retirement income plan.
Using a Reverse Mortgage Line of Credit
For many people entering their retirement years, it makes good financial sense to open a reverse mortgage line of credit as soon as possible. Once established, the available line of credit continues to grow each year, even if the underlying value of the house does not appreciate.
In addition to serving as a hedge against portfolio depletion, a standby reverse mortgage line of credit can serve as long-term-care insurance or a deferred annuity, using the home as collateral instead of paying insurance premiums. No repayment is required until the last borrower sells the house or moves leaves the house. In addition to allowing investment portfolios to grow, leveraging proceeds from a reverse mortgage allows retirees to delay Social Security benefits, increasing the monthly benefit payments later in life.
Ultimately, housing equity is too large an asset to be ignored in the planning process, especially when considering retirement income and cash flow. For example, replacing current mortgage debt (requiring monthly payments) with a reverse mortgage could significantly improve cash flow. Reverse mortgage payments are optional—not mandatory. Also, a reverse mortgage can be used to eliminate other debt, fund health and long-term care costs, or simply create a growing standby line of credit for future needs.