Since 2013, the federally-insured reverse mortgage program has gone through so many dramatic changes that it’s no longer the reverse mortgage everyone thought it was. Some of the changes added consumer protections, while others radically altered the way reverse mortgages are obtained.
Unfortunately, many perfect candidates will continue to believe that the reverse mortgage is ONLY for the desperate homeowner with plenty of equity and no cash. I don’t fault them for this – the most common reverse mortgage, the Home Equity Conversion Mortgage (HECM), has been marketed that way. However, recent modifications by the Federal Housing Administration (FHA) have highlighted the financial planning advantages for the affluent. So, let me describe the three categories of homeowners who now come to me for reverse mortgages.
- Reverse Mortgage for immediate NEED
Generally, these traditional HECM borrowers are house rich and cash poor. And they need money now. In many cases, we can help them. A good example might be a homeowner who needs in-home care. Monthly payments generated by home equity conversion can help when they, or their heirs, are unable or unwilling to pay for these expenses.
Many people assume that the need for money is the ONLY reason to get a reverse mortgage. Yet, this traditional type of homeowner is a smaller piece of the pie now.
- Reverse Mortgage to enhance LIFESTYLE
Because reverse mortgages do not require monthly principal and interest mortgage payments, obtaining one can help with cash flow. Yet, there are many other lifestyle advantages. Tenure payments are a form of monthly draw. Tenure means permanent, and these monthly payments will continue as long as the homeowner occupies the home. This is a great way to improve the quality of life of someone on a fixed income.
Others enhance their lifestyles by accessing home equity to pay for home upgrades, travel, or new vehicles.
- Reverse Mortgage as part of a comprehensive financial PLAN
Financial planners are now recommending reverse mortgages for clients who do not have an immediate need for them. Why? In part, because many homeowners have disproportionate amounts of their retirement savings held in real estate. Drawing part of their monthly income (tax-free) from their home equity nest eggs will help their traditional retirement funds last much longer.
The primary financial planning advantage, however, is the line-of-credit (LOC). This option allows homeowners to have an emergency fund that grows (again tax-free) at current interest rates. The funds are easily converted to monthly income later in retirement. Because the LOC experiences compounding growth, many homeowners will opt-in as early as possible, and draw their increased funds at a later date as a form of tax-free retirement income.
The HECM is still used by homeowners in need. However, research in the Journal of Financial Planning advocates that homeowners, age 62 or older, use this same program as part of a comprehensive retirement plan. Take a closer look. It’s likely not the reverse mortgage you thought you knew.
Dan Hultquist