By Steve Resch
Outdated perceptions and lingering misconceptions about reverse mortgages could be holding many retirees and pre-retirees back from considering their use. That's a shame, because these products, with enhanced safeguards enacted in recent years, have made them powerful tools that can enhance a retirement plan in many situations. Also, some proprietary products have loan amounts as high as $4 million, further expanding the number of homeowners who could benefit from these equity-accessing financial tools. Of course, everyone should consult with a trusted financial professional to seek advice for their specific retirement planning situation and to see whether a reverse could be right for them, and I would encourage financial advisors to become familiar with the various use-cases where a reverse mortgage may be helpful to their client’s retirement journey.
To help illustrate how reverse mortgages can be leveraged in a financial plan, here are some hypothetical situations that illustrate where these loans can improve the financial stability of borrowers.
Scenario #1: Reduce Asset Distribution Rates
Terry and Maya are both 66 years old. They own a home worth $2.5 million and have $1.5 million in retirement assets. They would like to retire, however, they have a $600,000 first mortgage lien with monthly principal and interest payments of $2,500. Because of this, they calculate they will need to withdraw about 6% per year from their retirement assets to cover their expenses, which is well above the 4% rate that most advisors would suggest.
Since a reverse mortgage doesn't require the monthly principal or interest payments, this couple can use the loan proceeds to cover their expenses and lower their asset distribution rate from 6% to 3.5%. Because they will be retaining more of their invested assets, it could help offset any loss of equity from the reverse loan.
One of the main reasons homeowners get a reverse mortgage is to eliminate a monthly mortgage payment. For Terry and Maya, it was to help preserve invested assets; in other cases, it could simply be to free up monthly cash flow. The extra money can go a long way to help balance the household budget or even pay for other retirement essentials such as a long-term care (LTC) plan.
Funds from a reverse mortgage can be used for several purposes that can both safeguard and enhance a retirement plan. Some of those uses include:
Scenario #2: Utilizing a Reverse Mortgage Line of Credit
Charlene is a 72-year-old widow. She owns her own home, which she would like to stay in for the rest of her life. She has sufficient income from her investments, pensions, and Social Security, and a hybrid life insurance/LTC policy to manage any long-term care needs.
She has three grandchildren, all of whom will be in college over the next 10 years. She would like to be able to assist with their education expenses, but if she draws down her invested assets to do so, it will not only reduce her future income potential but also cause her to incur income taxes.
A solution for Charlene is a reverse mortgage line of credit, where she can withdraw a projected $40,000 per year, based on her age and the value of her home, for the next 10 years to help achieve her objective. She will make payments directly to the grandchildren's colleges to avoid gift tax liabilities as well. By leveraging her home with the reverse mortgage, she can experience the joy of giving while still alive, with no impact on her current lifestyle.
Scenario #3: Making Home Equity Liquid
Steven, a high net worth 68-year-old, also wants to use the equity he has in his home now to help his children. He can secure a multi-million-dollar proprietary reverse mortgage for his home which will pay off his existing mortgage and provide enough additional cash for him to purchase outright homes for each of his two children. With no more monthly mortgage payment and the additional cash from the reverse mortgage, Steven is able to retire and experience the joy of helping his two children get set up in a solid financial position.
Ultimately, given the right circumstances, the reverse mortgage can provide a great opportunity to both fill in the gaps of a retirement plan or facilitate gifting and legacy desires while still living. With home values at record highs and interest rates still at low levels, this could be a great time to secure a reverse to help manage both needs and desires going forward.
About the author: Stephen Resch
Stephen Resch is the vice president of retirement strategies at reverse mortgage lender Finance of America Reverse LLC. The views expressed in this article are those of the author alone and do not necessarily reflect the views and opinions of his employer. This article is not intended to provide financial planning, wealth management, or tax advice. For tax advice, please consult a tax professional.
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