Reverse Mortgages: Are They Right For Me?

What is a reverse mortgage? Technically, a reverse mortgage is a loan. If you are 62 years of age or older, a homeowner, and you have considerable home equity you can borrow against the value of your home and receive funds as a lump sum, fixed monthly payment or line of credit. Unlike a forward mortgage – the type used to buy a home – a reverse mortgage doesn’t require you as the homeowner to make any loan payments.

The entire loan balance instead becomes due and payable when the borrower dies, moves away permanently or sells the home. Federal regulations require lenders to structure the transaction so the loan amount doesn’t exceed the home’s value and the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance does become larger than the home’s value. One way this could happen is through a drop in the home’s market value; another is if the borrower lives a long time.

Reverse mortgages can provide much-needed cash for seniors whose net worth is mostly tied up in the value of their home. On the other hand, these loans can be costly and complex – as well as subject to scams. This article will teach you how reverse mortgages work, and how to protect yourself from the pitfalls, so you can make an informed decision about whether such a loan might be right for you or your parents.

There are typically two different profiles of individuals that can use a reverse mortgage in retirement.

1) an individual that hasn’t save enough while in retirement: these people could benefit from a tax free guaranteed income stream that a reverse mortgage could offer, but they need 50% equity in their home and it would eliminate their mortgage payment or they would have access to an income stream;

2) an individual that has plenty of savings and has paid off their mortgage could establish the reverse mortgage to set up a reserve account which could be used for many different purposes, healthcare-related, buffer strategy to protect the portfolio (in case of economic downturn) or life insurance needs;

As retirement specialists (and based on our own independent research and analysis), we feel that reverse mortgages are a valuable arrow in a retiree’s quiver. Even though as financial advisors we don’t underwrite reverse mortgages or earn any fees or commissions based on recommending them, we are committed to serving our client’s best interests as they plan for retirement. As such, when appropriate, we educate clients on the value of a reverse mortgage. It’s been our experience that many pre-retirees are unaware of the value of this retirement tool and we look forward to sharing your report with our clients. Leading independent research indicates that the use of home equity in retirement will increase the probability of portfolio survival and increase the legacy to loved ones. We call HECM Loans or Reverse Mortgages the “Swiss Army Knife” of retirement planning since they can be utilized as part of many diverse retirement planning strategies.

Recent academic publications endorse retiree’s establishing reverse mortgages as soon as they reach the minimum age of 62. Research and analysis shows that the use of a reverse mortgage in retirement will have a positive effect on portfolio survivability and provide potentially a better retirement outcome. In his article entitled, HECM Reverse Mortgages: Is Market Failure Fixable?, Jack Guttentag, professor at the Wharton School of Business states that, “reverse mortgages have been much maligned by misinformation. It’s important to find ‘kosher’ reverse mortgages that are low cost and customer friendly.”

The reserve account created by the reverse mortgage grows over time and this account value can be used for many purposes including:
• an income buffer when the investment portfolio loses value due to a market downturn
• a long term care or life insurance reserve account
• an emergency fund
• a last resort fund in the event of retirement portfolio exhaustion

In addition, principal and interest payments are eliminated for a retiree and can be a great aid in reducing monthly expenses utilizing this feature. Of course, all P&I payments are built up inside the reverse mortgage and will be paid back at the time the home is sold by the retiree or the estate. Another feature that can help a retiree produce additional monthly income is what is known as the tenure payment option. This option will pay the retiree a guaranteed, tax-free monthly income for life. But as explained earlier, all income with interest will build up within the mortgage balance to be paid upon the sale of the property by the retiree or the estate.

The retiree, as with any mortgage, retains home ownership as well as equity, contrary to popular belief. All reverse mortgages are HECM (Home Equity Conversion Mortgage) loans and are considered non-recourse loans since a retiree will never be responsible for more than 95% of the fair market value of the home. In the event the outstanding loan balance with interest is larger than the property value, the retiree can “walk away” from the property and not be held responsible for the negative balance. As well, if the retiree dies in a negative balance situation, a surviving spouse or any children are also not responsible for the negative account balance.

To learn more about reverse mortgages and if they’re a smart option for you, give us a call at 978-345-7075 or email us at info@yourretirementadvisor.com