Blog content updated on 11/3/2021
Why are today’s financial advisers taking a different view of reverse mortgages?
It was once seen as a tool of last resort—but now, more and more financial advisors are realizing that a reverse mortgage can be a useful retirement planning tool as part of a comprehensive financial plan, to help make sure that people don’t outlive their money.
What brought about this change? Likely a number of factors. Over the years, rules have been put in place by the Federal Housing Administration (FHA) to protect consumers and ensure the health of this government-backed loan program for older adult homeowners.
And today, some seniors are finding that traditional sources of retirement income just aren’t sufficient. For many, home equity is the biggest asset they have—why not use it to their advantage? Research has shown that used responsibly, a reverse mortgage can help seniors meet their financial goals.
Pete Woodring, RIA, is one those advisors who has had a change of heart about reverse mortgages, and discussed his views in a contributing piece for Kiplinger.
“Until recently, the subject of reverse mortgages rarely ever came up in my consultations with clients,” he explains. “When it was discussed, it was the client who brought it up…I’ve since reconsidered my bias against reverse mortgages, and now view them as a viable tool in the context of a holistic retirement income plan in certain situations.”
Why the key to a secure retirement may be the one that opens your front door.
Today’s retirees have been forced to rethink how they fund their retirement. For many, the traditional “three-legged stool” of retirement funding—Social Security, pensions, and savings—is no longer enough to pay for the kind of retirement lifestyle they envisioned.
That’s where a reverse mortgage—and home equity—come in.
For many of today’s older adult homeowners, their largest retirement asset is their home. In fact, according to the National Reverse Mortgage Lenders Association, total home equity for America’s homeowners age 62 and older reached a record $9.25 trillion during the fourth quarter of 20201. The average amount of home equity for senior homeowners age 65+ is $143,500.2
So it’s no wonder that more financial experts and advisors are recommending that retirees consider accessing their home equity as another source of funds—and one way to do that is through a reverse mortgage.
To review: how a reverse mortgage works.
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a loan designed to help homeowners aged 62 and older tap into some of the equity in their homes. The proceeds are first used to pay off anything remaining on your existing mortgage, and you get the rest—as a lump sum of cash, monthly payments, a line of credit, or any combination. You continue to live in, and own, your home.
You can use the money in any way you wish. And best of all, monthly mortgage payments are up to you, as well—pay as much or as little as you like, or skip them entirely.3 As long as you meet the terms of your loan, it doesn’t come due until the last borrower leaves the home.
How much you can borrow is based on how much home equity you have, the age of the youngest borrower, and current interest rates. In general, the more home equity you have and the older you are, the more you can receive.
How reverse mortgages can help older adult homeowners in retirement.
Some older adult homeowners can use the proceeds from a reverse mortgage to increase their cash flow to pay everyday expenses—so they can avoid having to dip into their investment assets, or take their Social Security benefits early. And while investment values can rise and fall in a volatile market, reverse mortgage proceeds can provide a reliable source of funds.
But even for those who don’t have an investment “portfolio” to protect, a reverse mortgage can be a useful retirement planning tool. Many homeowners simply use the loans to pay off an existing mortgage so they can use that monthly cash for something else, help reduce other retirement debt, or supplement their monthly income.
There are many other reasons to consider drawing on home equity with a reverse mortgage:
- Make home improvements or modifications in order to “age in place”
- Pay off an existing mortgage or other large debts
- Help family members with their financial needs
- Help cover rising medical, long-term care, or in-home care costs
Older adults have paid a lot into their homes. Now, their homes can start paying them back.
Click here to read the full story of why one financial adviser is looking at reverse mortgages differently. If you’d like to take a second look at a reverse mortgage for your retirement plan, ask your adviser or call Longbridge Financial at (855) 523-4326.
- Real estate taxes, homeowners insurance, and property maintenance required.