No longer a solution of last resort, but a new component to an overall plan
by Stephen R. GreenbergMr. Greenberg is a licensed Branch Manager at Reverse Mortgage Funding LLC. Since 2005, he has been educating older adults, their families, and trusted advisors on the features and potential benefits of HECM loans. He works with financial advisors, attorneys, CPAs, and insurance professionals to demystify reverse mortgages, helping professionals and clients understand how the product can enhance the retirement plans of a new generation of retirees. Connect with him by e-mail: email@example.com. Visit www.RMFHECM.com. Part II in a three-part series
How things have changed. In the past, a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, had a reputation as a financial solution of last resort, only for those who had no other options.
Today, due to positive product advancements, a growing body of evidence indicates that a reverse mortgage can be a versatile, useful tool for financial advisors who are building retirement plans for their clients—one that can work in concert with other financial solutions as part of a comprehensive strategy.
We discussed in last month’s edition how a reverse mortgage can help fund long-term care through its Line of Credit option—a viable alternative for clients who either can’t afford, or do not qualify for, Long-Term Care insurance.
In this and future editions, we’ll delve a little deeper into reverse mortgages and examine other ways in which they can play a key role in your clients’ retirement strategies.
A growing life-expectancy
The average life expectancy for Americans has undergone amazing growth. It’s projected that by 2020, life expectancy for males will be 77 years for men and 82 for women.1 That’s a significant increase from expectancies as recently as 1990, when the numbers were just 72 years for men and 79 for women. While living longer certainly is a good thing, it presents significant financial challenges because people will need that much more money to fund their retirement—which now, in some cases, could last up to 30 years.
It also means that the traditional “three-legged stool” of retirement funding options—savings, pensions, and Social Security benefits—may not be strong enough to bear the weight of an extended retirement and the added expenses that go with it.
Common strategies to help fill this funding gap may include working longer, saving more, delaying Social Security, or buying an annuity. Before you consider them with your clients, let’s examine each option in more detail based on the latest information.
- Working Longer
Today, a significant number of your clients won’t be able to work longer. According to a recent study, nearly half of retirees say they left the workforce earlier than they had planned—often to cope with a health problem or disability (61%), or to care for a spouse or other family member (18%).2
- Saving More
This also may be a challenge. Because despite the fact that many aren’t financially comfortable themselves, a surprising number of Americans are helping to financially prop up family members who are in worse shape. According to a new study by TD Ameritrade, one in five adults in the United States has given financial support to a parent and/or adult child over the past 12 months—costing a staggering $630 billion.3
Here’s the breakdown:
|Age Group |
|Percentage who are|
|Average spent over|
the past year
|Baby Boomers (51-69)||25%||$9,700|
|Gen Xers (35-50)||19%||$9,700|
TD Ameritrade Holding Corporation, 2015 Financial Support Survey
Even more concerning is that the same study found that these financial supporters carry, on average, $97,000 in debt of their own. So who is going to support them financially, as they increase personal debt to help others? In cases such as these, a reverse mortgage could benefit the supporter and the family members who need support. Adult children supporting their parents could be relieved of some financial burden and concentrate on their own retirement funds, college savings, and investments if their parents use reverse mortgage funds to close the financial gap.
- Delaying Social Security
Most people are choosing—or have been forced by circumstance—not to do it. The percentage of retirees who opted to receive Social Security at age 62, the earliest age at which a person can claim benefits, is the largest of any group. In 2013, 35.7% of men and 41.3% of women signed up at age 62, while just 1.4% of men and 2.5% of women waited until they were 70 or older to take Social Security.4 How can these people fill the gap in their retirement income that they created by taking their benefits early? A reverse mortgage could offer your clients another option, by allowing them to supplement their income with a steady stream of monthly loan funds. Other clients may be able to use funds from a reverse mortgage to “bridge the gap” for a few years so they can delay taking Social Security in order to receive a larger monthly benefit.
- Buying An annuity
Both an annuity and a reverse mortgage can provide monthly payments to your clients. However, for those clients who don’t have the money to purchase an annuity, a reverse mortgage could provide access to the funds they need. Plus, certain annuities may have death and survivorship risk that could put a spouse at risk if an annuitant should pass prematurely. Conversely, a reverse mortgage can be used to provide funds for as long as either both spouses, or a surviving spouse, remain in the home. An option such as the low-cost HECM5 from Reverse Mortgage Funding LLC (RMF)—which can eliminate nearly all upfront costs—could help minimize the immediate financial impact on your clients.
How does this relate to the annuity idea? Depending on the age of the borrowers, a HECM will provide access to about 48% to 65% of the equity in the home—so to create a rainy-day fund, your clients could access some of the cash on a monthly basis and put the rest in a HECM Line of Credit to have in case of emergency.
How does it work for your clients?
The FHA-insured HECM program was created specifically for homeowners age 62 and older. A HECM is a home-secured reverse mortgage loan that allows borrowers to access a portion of their home equity as income tax-free funds—as long as at least one of the borrowers lives in the home as their primary residence. Funds may be taken as a line of credit, monthly tenure or term payments, a lump sum, or in any combination.
For most homeowners, the key benefit of a reverse mortgage loan is that there are no monthly principal and interest payments required—though if clients want to make payments, they certainly may. As with any mortgage, for the loan to remain in good standing the homeowners must keep current with property-related taxes, insurance, and maintenance.
Repayment is deferred until the last borrower (or protected non-borrowing spouse meeting certain criteria) sells the home, moves out, or passes away. So for example, the loan would become due if all surviving borrowers move permanently into a nursing home or assisted-living facility, or leave the home for one year.
Clients who wish to delay taking their Social Security benefits could use a HECM to provide an income tax-free monthly disbursement for life, as long as one of the borrowers meet their loan obligations and maintains the property as their principal residence.
They could use a similar strategy to delay collecting only 75% of their Social Security benefit at 62, and bridge the gap until their full retirement age. Or even better, they could stretch that to age 70 and gain an additional 8% per year from full retirement age to age 70. In this scenario, your client could take a monthly disbursement over the four- or eight-year “bridging the gap” period, then “shut it off” and convert it into a HECM Line of Credit.
These are just a few examples of how a reverse mortgage can be used to help construct the most effective retirement strategies for your clients.
1 U.S. Census Bureau, Statistical Abstract of the United States: 2012.
2 Employee Benefit Research Institute, 2014.
3 TD Ameritrade Holding Corporation, 2015 Financial Support Survey.
4 Social Security Administration, 2014.
5 Not available in Florida and Maryland; not available on fixed-rate or HECM for Purchase loans. Terms and conditions subject to change.
This material has not been reviewed, approved, or issued by HUD, FHA, or any government agency.
NOT FOR CONSUMER DISTRIBUTION.
Company NMLS ID: #1019941 (www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/1019941). Reverse Mortgage Funding LLC (“RMF”) is headquartered at 1455 Broad Street, 2nd Floor, Bloomfield, NJ 07003, telephone number 973-842-2448. RMF conducts business in the following states: Alaska Mortgage Broker/Lender License #AK1019941; Arizona Mortgage Banker License #0927682 – 21907 N. 77th Street, Scottsdale, AZ 85255; Licensed by the California Department of Business Oversight under the California Residential Mortgage Lending Act, License No. 4131266; Loans made or arranged pursuant to a California Finance Lenders Law license, License No. 603K578; Colorado Mortgage Company Registration, Regulated by the Division of Real Estate. To check the status of your Colorado loan originator, visit http://www.dora.state.co.us/real-estate/index.htm; Licensed by the Delaware State Bank Commissioner, Licensed Lender #012573; Georgia Mortgage Lender Licensee #36793; Illinois Residential Mortgage Licensee #MB.6760963; Kansas Licensed Mortgage Company, License #MC.0025179; Massachusetts Mortgage Lender License #ML1019941; Licensed by the Mississippi Department of Banking & Consumer Finance #1019941; Licensed by the New Hampshire Banking Department #18336-MB; Licensed by the New Jersey Department of Banking & Insurance; Rhode Island Licensed Lender #20132869LL; Texas Mortgage Banker Registration and Loan Servicer Registration, 6044 Gateway East, Suite 236, El Paso, TX 79905 and 12710 Eagle Ledge Lane, Tomball, TX 77377. RMF also conducts business in AL, AR, CT, DC, FL, HI, ID, IN, IA, KY, LA, ME, MD, MI, MN, MT, NE, NV, NM, NC, ND, OH, OK, OR, PA, PR, SC, SD, TN, UT, VT, VA, WA, WV, WI, and WY. Not all products and options are available in all states. Terms subject to change without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval. ©2015 Reverse Mortgage Funding LLC. L227-Exp082016
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