Sometimes this profession sends me in directions I never imagined. As I was preparing for my Spring review meetings, I developed a deliverable for those meetings, regarding Long Term Care. One of the six options, when it comes to paying for Long Term Care, is a Reverse Mortgage. Looking further into this, sent me into a deep dive of Reverse Mortgages. What a fun journey! Up to this point, I understood the basics of a Reverse Mortgage, but I did not see how it could play a part in retirement. Like most, I had a negative feeling about them and wouldn’t even consider them as a viable option during retirement. However, after this deep dive, I came to the conclusion that in the right situation, they can play a helpful part in your overall plan for retirement.
Our home provides a place to live and gather with family and friends. Aside from that, it is also an asset. For some, it may be the largest asset they have. Of course, we are not able to walk up to our home and simply ask for cash to cover some expenses or to provide us with income. It is just not that type of asset. So how do you use this asset? One answer is a Reverse Mortgage.
Let’s address the elephant in the room first; the Reverse Mortgage company would now own your home. Not exactly–they file a mortgage with the court, just like when you originally purchased your home and the bank filed a mortgage against the home. Nothing changes in that respect. You are still the owner of the home. The company will simply put a lien against the home to get any money back that was lent to you, before anyone else would receive anything. Your beneficiaries will receive the funds from the sale of your home, after the Reverse Mortgage is paid.
Well, wouldn’t the Reverse Mortgage eat up all of the value in your house? In 2017, some of the rules and the amounts that a couple or individual can access through a Reverse Mortgage changed. The amount was lowered, to prevent couples from eating up all of their equity. I recently ran some numbers for a couple, with the youngest individual being 65 years old, and a home value of $250,000. The maximum they could take out for a single payment was $116,750, (about 47% of the equity in their home) and $109,250 for a line of credit. You can do your own calculations of what might be available to you through a Reverse Mortgage, at Retirement Researcher. Capping at this lower amount, protects some of the equity for homeowners and also protects the lenders, should the housing market go flat or fall in the future. If for some reason the housing market crashes, and you owe more than what your house is valued at, the most the lender can get is what your home is sold for.
Alright, maybe those Reverse Mortgages are not quite as evil as you thought, but why would you use them? There are many ways you can benefit from having a Reverse Mortgage. The first is for cash flow; you most likely owe a balance on your home and have a monthly payment. With a Reverse Mortgage, your current mortgage would be paid off and you would no longer have monthly payments, therefore you would have more cash in your pocket every month. Having no debt against the house, you could get more cash into the home, monthly, through a steady stream of payments for a certain period of time, say 20 years, from a Reverse Mortgage.
When we are using our assets to fund our retirement each month, what do we do when we’re in a down market? Nobody likes taking funds out of the market when the market is down 20%, but what if you had access to other funds during this period of time and you could give your funds a chance to recover? As the recent article in the New York Times highlighted, Reverse Mortgages Are No Longer Just for Homeowners Short on Cash. This goes into some details as to the math behind the benefits of using a Reverse Mortgage with other assets.
There are other areas you can use a Reverse Mortgage for, as well: If you want to delay Social Security, you could use a Reverse Mortgage to cover those years. You could make some home improvements so you can age in your home. You could use it as “insurance” for the unexpected expenses that might show up later in life, such as Long Term Care. If you are considering a Reverse Mortgage, setting this up earlier tends to be a better option than waiting until later. Why is that? When you start a HECM, it grows over time. Back to the example of a 65 year old that starts with a line of credit of $109,250–this is projected to grow to $321,568 by the time they turn 85. This would most likely be larger than what would be available, had they waited until age 85 to start the Reverse Mortgage.
As with all planning, everyone’s situation is different, and before starting a Reverse Mortgage, you will want to do some research into the numbers and understand how this will work for your situation. Reverse Mortgages have up front costs that need to be considered also. Would you pay for those up front or leave those costs in the mortgage, which interest is charged against? There is a lot to consider when taking out a Reverse Mortgage, and like any other financial tools, you need to understand your goals, what you are doing it for and decide if this is the best avenue to accomplish those goals. The one thing that I’ve concluded after this deep dive, is that Reverse Mortgages should be a part of my conversations with retirees. Then, you can decide whether it fits into your overall retirement plan.
Back to my retirement research hole, to find something new to look into for a future newsletter. Chat with you in a couple of weeks.
Here’s the book I read to help me understand the role Reverse Mortgages play in retirement. The Retirement Researcher’s Guide Series: Reverse Mortgages. How to use Reverse Mortgages to Secure Your Retirement, by Wade Pfau, Ph.D., CFA
*A reverse mortgage is exclusively for adults 62 and older. To be eligible, you also must live in the home as your primary residence, so you can’t use a reverse mortgage for a vacation or investment home. As with a traditional mortgage, if you fail to keep up the home, pay your property taxes and homeowners insurance, or fail to comply with your loan terms, your loan could go into default. Use of a reverse mortgage loan will draw down your equity. The decision to take out a reverse mortgage is one you should weigh very carefully.
Greg Korn President & Investment Advisor Representative
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