Tuesday, December 12, 2017

A New View of Reverse Mortgages

At the 2017, Financial Planning Association (FPA) meeting, the topic of reverse mortgages in retirement decisions came up in several presentations. The new view of reverse mortgages is that home equity can be used as a financial planning tool and not just as a last resort. Below are some of the key concepts that were presented:

  • About 10,000 people today will reach age 62 for the next decade; 3,000 are still making a mortgage payment.
  • Reverse mortgages allow people to receive funds as a lump sum, a line of credit, or monthly payments.
  • With regard to criticism of that reverse mortgages “spend a child’s inheritance,” gradually depleting home equity via a reverse mortgage is no different than withdrawing money from retirement savings accounts.
  • Borrowers (or their heirs) will never owe more than their home’s value.
  • No payment is owed until the last living borrower permanently leaves the home.
  • People have three ‘buckets” of money as potential retirement income sources: Bucket 1: income, Bucket 2: nest egg (savings and investments), and Bucket 3: home equity. Bucket 3 home equity distributions via a reverse mortgage can be used to delay using Bucket 2 withdrawals during market downturns.
  • Some experts advise applying for a home equity line of credit at age 62 for possible use in later life.
  • Reverse mortgage payments can help protect other assets (e.g., long-term-care and life insurance premiums).
  • The CFPB recently issued a report that was critical of reverse mortgages as a financial planning tool. Some financial experts have questioned the methodology of this study, however. Bottom Line: there are a variety of opinions about the benefits and disadvantages of reverse mortgages for older homeowners. Potential borrowers need to examine them closely to determine if RMs are a good fit for them.

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