Homeowners can benefit from evaluating the options presented by reverse mortgages – specifically, Home Equity Conversion Mortgages (HECM), sponsored by the Federal Housing Administration (FHA) – starting at age 62. While the product may not work for everyone, assessing the potential benefits of a reverse mortgage may be reasonable and should not be overlooked.
This was reported by Robert Klein, founder and president of the Newport Beach, California, Retirement Center, in a new column on The Street.
“An appraisal should be done whenever we think about refinancing, buying a new home, or planning other major financial changes,” writes Klein. “In any situation, HECM can increase cash flow, cut costs and increase retirement savings.”
He goes on to list five “metrics” that can be used in assessing whether a reverse mortgage makes sense for them in the so-called “HECM Pentathlon,” which includes determining the projected mortgage balance; projected savings over retirement; projected carry forward of total net worth to later years; HECM’s projected line of credit and the impact it might have on the cash flow situation; and the predicted liquidity that the customer can access.
Even with a small mortgage balance sheet, HECM can be profitable, Klein said.
“Most retiring people who own a home still have a mortgage, a home equity loan, or an outstanding HELOC balance,” he writes. “Many of them will not pay off within 10-20 years. Even if you have a minimum or no mortgage balance, you should consider HECM if access to tax-free liquidity is important or will be important to you during your retirement. “
Regarding how projected savings relate to retirement, Klein points out that regular mortgage forward payments will affect the savings position of anyone living on a fixed income. Using a product that eliminates the need for monthly loan payments can be beneficial.
“Likewise, when you don’t pay through HECM, which most people do, you have the opportunity to save money that would otherwise be used to pay off mortgages,” he says.
However, two key principles of this “pentathlon” may be the most important in determining whether a reverse mortgage is the best choice: Projected Line of Credit and Projected Liquidity, respectively.
“[These two metrics] when evaluated together, they are the most compelling criterion for using HECM as a retirement income planning tool to extend the life of retirement assets, ”he says.
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