Once highly controversial, reverse mortgages are gaining acceptance among financial planners as the long-standing retirement savings crisis grinds on.
While some planners remain skeptical, others now see home equity "conversion" loans as a way for clients who have struggled to save to augment their retirement income.
Once considered the Wild West of mortgage lending, reverse mortgages have seen their reputation rise amid tightened lending standards by the Federal Housing Administration, which insures the mortgages.
"Reverse mortgages can be a good tool for retirees," said Thomas I. Rindahl, a CFP and financial advisor at TruWest Wealth Management Services in Arizona.
When they first arrived on the scene, reverse mortgages wound up getting negative publicity thanks to overly aggressive brokers, some of whom reaped outsized commissions on loans to financially unsophisticated seniors.
The nadir came in the aftershocks of the Great Recession, in which as many as 10% of all reverse mortgages fell into default.
The Federal Housing Administration, which insures reverse mortgages, responded by tightening up on the requirements for the homeowners looking to take advantage of the Home Equity Conversion Mortgage program.
The reforms limited the amount of equity a homeowner can take out in the first year to 60%, removing the obvious temptation of a single, sudden windfall.
The FHA tightened credit standards as well. Homeowners whose finances were not quite up to par can be required to put money aside in an escrow account to cover future expenses.
In order to qualify for a reverse mortgage, you'll need to be at least 62 and have substantial equity in our home, as well the ability to keep up with taxes, insurance and home repairs.
"With the US government stepping in with FHA insurance on these financial instruments, reverse mortgages have become a lot safer and more predictable compared to the days of the horror stories that one would read about where someone lost their home to a reverse mortgage," George Gagliardi, founder of Coromandel Wealth Management in Lexington, Mass. and a CFP.
Gagliardi, who said he has "several clients" with reverse mortgages, calls them the "Swiss Army Knife" of financial planning tools.
Reverse mortgages can provide additional retirement income, a "more cost-effective replacement for Long Term Care insurance," or to help put off taking Social Security and reap a higher monthly payment by delaying retirement.
"For many Americans, particularly those who haven't saved enough for their retirement, tapping into their largest source of equity can be a true lifesaver," Gagliardi said.
Along with the lump sum, the other options for a reverse mortgage involve either getting a monthly annuity or taking out a line of credit, an option that gained the most acceptance among planners.
Lines of Credit
Some planners see particular promise in a reverse mortgage line of credit, which can grow as much as 3% to 4% a year.
Of course, when you tap into the line of credit, the amount you take out no longer grows but rather starts to accrue interest.
But whether it's through a reverse mortgage credit line or a simple lump sum, it can be helpful to have another source of money to draw upon, some planners say.
Dennis Nolte, vice president and financial advisor at Seacoast National Bank in Florida and a CFP, noted his parents and his in-laws have both taken out reverse mortgages.
Nolte particularly likes the idea of having "three buckets of money in retirement -- cash, investments, and home equity -- that clients can tap into depending upon how financial markets are doing."
That means pulling money from investment market accounts when stocks are up and shifting to real estate when the market is down.
"We're absolutely seeing more of a need to discuss home equity as part of a retirement plan if the liquid asset numbers/guaranteed incomes like Social Security/pensions aren't enough to make the plan work," Nolte said.
Lee Dimon, a CFP with Bunting and Somma, sees promise in the use of reverse mortgage credit lines, which he sees as the big trend in the field.
While Dimon has recommended this as an option, so far, he has not had any takers, with clients reluctant to go this route because of "perceived high closing costs."
"The availability of a line of credit that grows every year can be valuable for the right client in the right situation," Dimon said.
Still, some planners remain skeptical.
Allan Katz, owner and founder of Comprehensive Wealth Management Group on Staten Island and a CFP, contends taking out a reverse mortgage effectively ends any hope of passing down a family home.
Even if the children don't wasn't the home, the parents may still want them to reap the benefits from the sale of the house after they die. But the interest that accrues on the reverse mortgage often wipes out any remaining equity.
In this case, it may be better to simply sell the house, pocket the equity and downsize, Katz said. The money can be reinvested and used as the backstop they were originally looking for through a reverse mortgage.
"I don't recommend reverse mortgages except as a last resort," Katz said.