Trendspotter: Reverse Mortgages Help Retirees Benefit From Their Largest Asset

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“Most households do not change their place of residence even for several decades,” the researchers write, concluding that “using home equity through a reverse mortgage loan or deferred property tax” [is] a financially viable strategy. “

Drivers

  • Low interest rates mean that now is a good time to create reverse loans.
  • The increase in the number of paid consultants can stimulate the use of equity capital as part of the financial planning process.
  • An aging population in need of retirement income, wanting access to stuck capital.
  • Reverse mortgages are a way to curb the sequence of return risks by providing retirees with an alternative to withdrawing funds from their investment accounts in a falling market.
  • Most reverse mortgages are government-insured home equity conversion mortgages (HECMs), although the private sector of larger mortgages is also growing.
  • New regulations in 2017, bad actors were purged from the industry.

Buzz

Jamie Hopkins, Director of Retirement Research, Carson Group:

  • Very few consultants are really good at incorporating home equity. [into planning but] house value [should be included] into their overall planning.
  • FINRA spoke about [reverse mortgages] as an asset or as a final strategy. But when you start testing it, the “strategy of last resort” is just about the worst way to use reverse mortgages. Let’s say a person has three assets: [separately] growing by 3%, 5% and 8%. If you are retired, what assets do you spend first: 3%, 5% and 8%. [in that order]… … your home has historically been growing at around 3.2% … and perhaps your stock is 8%. This is a traditional layout. So you shouldn’t use [home equity] as a last resort, because it will be your most illiquid [or] The capital is “blocked”, and it will grow to the smallest extent. “
  • I always advise advisers [before recommending] reverse mortgages, ask five or six guiding questions. You have to ask them, “Where do you want to live?” [If they say] “I want to grow old on the spot.” Okay then, [ask] “Have you thought about ways to access your own home while you live here? [Have you] refinanced before? What are you planning to do with the house? [What about] long-term financing, long-term [health] care? You live [your home] to my children? “These answers influence strategy. You can start at [a reverse mortgage] conversation if the answers are correct.

Wade Pfau, professor of retirement income at the American College of Financial Services, author ofReverse mortgages: how to use a reverse mortgage to secure your retirement”:

  • The most popular option – roughly 60% of the reasons for HECM – is not to carry over a traditional mortgage to retirement, but to refinance the mortgage into a reverse mortgage and cancel the fixed payment in the early years of retirement, when you’re most at risk of consistency.
  • [Reverse mortgages] provide more flexibility for planning because they take what is otherwise an illiquid asset at home and create liquidity for it so you can strategize about spending. You don’t just spend money from your investment portfolio. Now you can also reconcile between this and when you are going to spend from home equity. You will have more flexibility and more options to build your retirement plan.
  • It becomes part of [advisory] wheelhouse, but many consultants are still not very well versed in how reverse mortgages work today. And so they may not necessarily be real spoken. [on it]… Many people just [see] an investment portfolio with an overall return, not the entire basis in terms of seeing the value of things like reverse mortgages or annuities. This is all based on the recognition that changes in risk at retirement and a traditional diversified investment portfolio with multiple asset classes do not necessarily work as well when you make distributions and try to fund a retirement lifestyle, as opposed to simply strive to accumulate assets and build the largest possible asset bank.

Stephanie Moulton, John Glenn College of Public Affairs, Ohio State University, author several studies on reverse mortgages and consumer finance:

  • We did see there were some spikes in demand [for reverse mortgages] around COVID. Reverse mortgages can provide liquidity to help [people] close your house [mortgage]… When COVID hit, banks did say they were not going to open any lines of credit for home equity. [but] Reverse mortgage lending continued during this period. It comes as no surprise to me that interest has been heightened.
  • IN [2018] Policy reforms are cutting the amount of capital people can get from a reverse mortgage. And it actually prevented people who might otherwise have done the opposite from getting them because they may have had too much forward mortgage debt. You must pay off all of your forward mortgage debt when you receive the reverse. … We know that the proportion of older people with forward mortgage debt has doubled since the 1990s. At first, we wondered why these people are not giving up. And if you think of it in terms of cash flow, a $ 150,000 forward mortgage payment where you have a monthly payment of, say, $ 1,200 or $ 1,700 a month. If you pay back, you free up that cash flow. Basically, it’s like an annuity because you give yourself back that money you paid on your mortgage. And it makes sense that people did this. But many failed because they had to pay off their forward debt.
  • One drawback – [it is hard to compare loan options because] the guys who sell reverse mortgages are separate from the people who sell [home equity lines of credit]that are separate from financial planners who may sell other products. So you are comparing these products in isolation rather than thinking of them as a portfolio. The more [we can look] with reverse mortgage lending along with these other options, then figuring out which one is the right one makes sense.

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