Quite seriously… when you don’t need it
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 protected] Visit www.RMFHECM.com. Part III in a three-part series
As a licensed reverse mortgage professional, one of the most common questions I get is, “When is the best time to obtain a reverse mortgage?” My answer often surprises people, but when you think about it, my answer also makes complete sense. Quite simply, “When you don’t need it — especially now that there are options that can significantly reduce or nearly eliminate the upfront closing costs. Why wouldn’t you?” When looked at as part of an overall retirement strategy, a reverse mortgage can add protection against the “longevity risk” of outliving one’s money — the number-one concern for many.
Let’s take a quick look at the last two articles in this series and review what we’ve discussed so far. In the first, “A Practical Solution for Funding Longevity,” I discussed that a reverse mortgage line of credit, when used in addition to, or in place of, long-term care insurance (LTCI), can be an effective way to support a client’s long-term care protection plan, particularly if the client is self-insured, or can’t afford or does not qualify for LTCI.
In article two, “Reverse Mortgage Adds Alternative Retirement Funding Strategy,” we talked about the common strategies of the “Three-legged Stool,” delaying Social Security, working longer and saving more, and how a reverse mortgage fits within those strategies.
To be eligible for a reverse mortgage loan, your client must be a homeowner age 62 or older. It may be best suited for those whose home is owned free and clear, or has a loan balance of less than 50% of home value. There are several strategies that point to why clients who are age 62 and older should consider a reverse mortgage sooner, rather than later.
What many people, professionals included, are just starting to learn about is the reverse mortgage credit line option, which can be priced competitively with a traditional Home Equity Line of Credit (HELOC) but offers considerable advantages. The reverse mortgage line of credit has a growth factor, meaning the unused portion will grow over time, regardless of any change in home value. This means that clients, for whom home equity is a significant part of their net worth, can use a reverse mortgage credit line as a means to increase the amount of home equity they may access. It can be a great alternative (or supplement) to a deferred income annuity (a.k.a. “longevity insurance”) or long-term-care insurance, and can be used as needed for expenses like healthcare, in-home care, or home modifications.
So how is the growth in the line calculated? Each month, the available credit line grows at 1/12 the sum of the current interest rate and the FHA mortgage insurance premium (MIP). Please note that the growth does not depend at all on any appreciation in home value. In fact, the home can depreciate and yet the growth still occurs.
Also, unlike a traditional HELOC, the lender may not cancel, reduce, or revoke a HECM reverse mortgage LOC, provided the borrower abides by the terms of the agreement (which includes making required payments for taxes, and insurance, maintaining the property, and living in the home as their primary residence). So, when and if an emergency or financial crisis hits, the funds will be there when they need them. Plus, your client can convert the line of credit into monthly disbursements at any time in the future.
Increasingly, financial experts are taking a new look at today’s redesigned mortgages and recommending them as an important option that should be considered as a way of leveraging home equity. While a reverse mortgage is not the answer for all, it can be for many, and it should certainly be an option to discuss. It’s all about education and understanding one’s options.
The Standby Stop-Gap
The Standby Line of Credit strategy can also be used as a “stop gap” for your clients during those market downturns, such as we just experienced. In cases such as this, your client simply falls back on the Standby Line of Credit, for needed funds, thus alleviating the pressure on their retirement accounts. When the market rebounds, your client could then pay back the funds borrowed from the LOC, thus regenerating those funds.
What about your client who may be withdrawing funds above and beyond their Required Minimum Distribution (RMD)? A reverse mortgage can be used to supplement the amount above the RMD, thus adding longevity and reducing income taxes, as the withdrawals are taxed and the reverse mortgage loan funds are generally not considered taxable income. (This is not tax advice. Consult a tax professional regarding your client’s individual situation.)
Another tried-and-true method of accessing additional retirement funds has been to downsize, and this is another way a reverse mortgage can be utilized. Whether your client is downsizing, upsizing or rightsizing, a reverse mortgage can be used to purchase the new home. In a scenario like this, your client would invest approximately 50% of the purchase price using their own funds, and the reverse mortgage would provide the remaining funds. Thus your client has no mortgage payments and remains more liquid. (As with any home-secured loan, they would of course need to keep current with property-related taxes, insurance and upkeep for the loan to remain in good standing.)
The use of a reverse mortgage as part of a client’s comprehensive overall retirement plan is a strategy that’s increasingly being embraced by leading financial experts. How can you incorporate home equity into a retirement plan for the best possible outcome for your client? The first step is education, and I hope these articles have helped.