The Strategic Uses of a Reverse Mortgage

The Strategic Uses of a Reverse Mortgage

Ask Bob: Is a Reverse Mortgage Right for Me?

A reader has done her homework but is still not sure whether or not a reverse mortgage is for her. Adviser Doug Buchan offers some perspective.
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Question

I have a question regarding reverse mortgages. As much as I have read on the subject, I am still not sure of the advantages and disadvantages. Can you please explain why someone would or would not want this?

Answer

In a nutshell, a reverse mortgage – technically called a Home Equity Conversion Mortgage (HECM) – is a special kind of Home Equity Line of Credit (HELOC), says Doug Buchan, CFP, wealth advisor with Buckingham Strategic Wealth. “Just like a traditional HELOC, you can open up a HECM and pull out tax-free cash from the equity in your home,” he says. And just like a HELOC, you can open up this line of credit for “just in case,” not tapping it at the outset.

Doug Buchan

Doug Buchan

But there are also some stark differences, notes Buchan. Unlike a traditional HELOC, if you do tap the HECM, you are not required to pay back any of the loan (as long as you live in the home). “And, while that’s a lovely benefit, the biggest – and most powerful – difference is that, unlike a HELOC, the amount of money you can borrow from your home grows every single year at a predetermined compounded rate,” he says. It’s this increased borrowing power that makes this strategy special.

A HECM is definitely more expensive than a traditional HELOC, generally at about 3%-4.5% of the value of the home, but there’s good reason for this. In more detail:

“You get a predetermined growth rate on the amount you can borrow year over year,” Buchan explains. “You’re not required to pay back any of the loan while you’re alive and living in your home, even if the loan becomes greater than the value of the house. In other words, there’s a great deal more risk for the lender, hence the higher costs.”

For retirees who are in their later years and are feeling house rich but cash poor, the HECM can be a good option. “But, in my mind,” says Buchan, “this tool is even more powerful for those in their 60s who don’t quite need any money from their home today but worry they may fall short of their income needs decades down the road.”

Buchan provides the following example of a hypothetical 63-year-old couple who lives in New Jersey and has a $650,000 house that is paid off. They could obtain a HECM today (but not tap it), and in 20 years – when maybe money is getting tight – they could potentially take out over $775,000 from their home, tax-free, and have no obligation to pay it back while one of them is alive and living in their home. If they wait until 25 years to tap the HECM, they may be able to take over $900,000, and if they wait 30 years, over $1.1 million.

Adds Buchan, we’ve all seen the jump in real estate prices across many parts of the nation. If you happen to live in one of these areas, and you fit the criteria, locking in a HECM today could make a whole lot of sense.

For informational and educational purposes only; not to be construed as specific investment, accounting, legal or tax advice. This is not a recommendation for a Home Equity Conversion Mortgage (HECM). Individuals should carefully discuss the advantages and disadvantages of a HECM and speak with qualified professionals with extensive HECM knowledge prior to implementing this strategy. The information presented may be based on third-party data and may become outdated or otherwise superseded without notice. The opinions expressed are the advisor’s own and may not accurately reflect those of Buckingham Strategic Wealth®


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Question

I have a question regarding reverse mortgages. As much as I have read on the subject, I am still not sure of the advantages and disadvantages. Can you please explain why someone would or would not want this?

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