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Even State Legislatures Look to HECM as Recommendation…

shutterstock_Money under lock & key 49213123State Campaign Points to Importance of Reverse Mortgages in Long Term Care

 

March 17th, 2014  |  by Elizabeth Ecker Published in News, Retirement, Reverse Mortgage

A state and federal initiative launched in 2012 has resulted in a report to lawmakers on long term care financing including the use of reverse mortgages to help Americans fund longevity.

The Own Your Future initiative in Minnesota was launched in 2012 to make recommendations to state and federal lawmakers on paying for long term care. Between 2005 and 2009, 26 states each sponsored Own Your Future campaigns to educate their residents about long term care challenges and make them aware of options and planning methods.

In Minnesota, the campaign was expanded to include an ongoing public awareness campaign throughout the state; efforts to make more affordable and suitable long-term care products available to Minnesota’s middle-income households; and evaluation of possible changes to Medical Assistance (MA) to better align with and encourage private payment for long-term care.

Among the recommendations developed by the state initiative: the use of reverse mortgages. An advisory panel has accepted the recommendations of the subcommittee with a separate set of recommendations having been sent to Congress.

“The Lieutenant Governor [Prettner Solon] has assured us that now that the report is out, it’s not a report that sits on the shelf. Action will be taken,” says Beth Paterson, a Minnesota originator who was appointed by the state’s governor to serve as the reverse mortgage representative on the advisory panel.

The report covers 11 recommendations, narrowed down from 16 that were considered, toward solving long term care funding problems for older Americans.

“The current long-term care financing marketplace consists of insurance products, home equity options  such as reverse mortgages, and health and retirement savings plans,’ the report states. “None of these products has seen widespread use recently due to a number of factors, including the perception of their stability, their safety and their benefit levels.”

Specific to the reverse mortgage market, the report indicates, are public perception challenges that are making it even more difficult for reverse mortgages to gain a place in the long-term care conversation.

“The market for reverse mortgages (RMs) is likewise in a difficult position,” the report writes.”Recently, state and federal  agencies have changed regulations governing the program to address consumer issues with the program, but the perception persists that RMs, as currently constituted, do not have adequate consumer protections.”

Advocates have developed action items for helping the perception around and access to reverse mortgages among Minnesotans.

Written by Elizabeth Ecker

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Financial Times: Reverse Mortgages Can Be Lifesavers


March 5th, 2014  |  by Jason Oliva Published in News, Retirement, Reverse Mortgage

The financial planning community is warming up to reverse mortgages, with some advisors finding them to be “lifesavers” for some clients in tight circumstances, a Financial Times article suggests.

As reverse mortgages overcome historically negative perceptions with the help of recent program changes and new consumer protections, Home Equity Conversion Mortgages (HECMs) have also begun to gain more recognition from financial advisors in mainstream retirement planning.

Dana Anspach of Scottsdale, Arizona-based Sensible Money told Financial Times she recently recommended a reverse mortgage to a widow in her 80s whose home was paid off and was supplementing her Social Security with a home equity line of credit.

“Anspach used a reverse mortgage to pay off the HELOC, wiping out $400 a month in interest payments and providing additional monthly income of $200,” the article notes.

Other advisors are recognizing that the tax-free proceeds from reverse mortgages can allow clients to postpone Social Security usage as part of a “post-retirement tax saving strategy,” which can keep clients from withdrawing too much from IRA or 401(k) accounts.

“The bottom line is that reverse mortgages are not longer only for retirees in dire straits. Advisors ‘should be looking at every aspect of income, including home equity,’” said CEO of Blue Ocean Global Wealth Marguerita Cheng in the article.

Read the Financial Times article

Written by Jason Oliva

 

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Reverse Mortgages Can Benefit Retirees, Both Wealthy and Not

Move Can Help Retirees Keep Investments Until Right Time to Sell

By Kelly Greene, WSJ
Jan 16, 2014 4:29 p.m. ET

Home = Cash 2Reverse mortgages aren’t just for people struggling to keep their homes anymore.

The loans also can work for well-heeled retirees looking for a buffer to keep them from selling investments at the wrong time, according to academic researchers. And Congress last month gave a boost to the type of reverse mortgage that works best for that purpose.

Reverse mortgages let homeowners who are at least 62 years old borrow against their home equity. The loans don’t have to be used for a specific purpose, but typically are used for home modifications, repairs, medical expenses or home care that elderly people might not otherwise be able to afford.

The loan is due, with interest, when homeowners move out, sell the home, die or fail to pay property taxes or homeowner’s insurance premiums. The homeowner’s heirs typically sell the house, pay the balance and keep whatever is left. At least 595,000 households have an outstanding reverse-mortgage loan, according to the National Reverse Mortgage Lenders Association, a Washington industry group.

In the past, many financial planners recommended reverse mortgages for their clients only as a last resort because fees were relatively high—as much as 5% of the loan amount. That changed a few years ago, when a new product was developed by the industry and insured by the Federal Housing Administration called the HECM Saver, which typically has lower upfront borrowing costs than earlier types of reverse mortgages. (HECM stands for “home equity conversion mortgage.”)

With lower borrowing costs, some planners are finding new ways to use reverse mortgages to avoid selling depressed investments or to lower tax bills. “Retirement is really about cash flow,” says Martin James, a certified public accountant in Mooresville, Ind. “Even for a person who’s got their mortgage paid off, it’s nice to have a line of credit sitting there.”

Earlier this year, the HECM program was eyed by federal lawmakers as a financial risk to the FHA, and lawmakers considered curtailing the program. The bill, passed by Congress and signed by President Barack Obama, is intended to give the Department of Housing and Urban Development the leeway to make changes to keep the program going, probably after Oct. 1, says Peter Bell, chief executive of the lenders’ group.

Getting a reverse mortgage takes some due diligence on the part of homeowners and their families. Big-name banks largely quit the business in the aftermath of the financial crisis, leaving smaller companies and independent brokers to make the loans. Some financial advisers have been accused by regulators of encouraging elderly homeowners to put their reverse-mortgage proceeds into questionable investments, such as annuities with steep penalties for cashing in.

The Consumer Financial Protection Bureau said last year that it would coordinate with other regulators to root out reverse-mortgage scams, monitor the market closely for deceptive and abusive practices and consider further measures. Interested in tapping your home as a security blanket?A few things to consider:

 Your house could be a reliable credit line. If your home-equity line of credit gets canceled, a reverse mortgage might be a good substitute.

Three certified financial planners at Texas Tech University in Lubbock and Edinboro University of Pennsylvania published a paper last year in the Journal of Financial Planning that recommends using a reverse-mortgage line of credit to meet retirement-income needs during a big market drop, rather than selling investments. “A few years ago, we were starting to get calls from clients saying, ‘Hey, my line of credit’s been canceled.’ They have plenty of resources, but that was an emergency pot of money,” says John Salter, the paper’s lead author. “It doesn’t do you much good if the bank’s going to pull it before you need it.”

The researchers used what they called a “standby” reverse-mortgage strategy, meaning the reverse-mortgage line of credit served as a source of readily available cash when retirees’ portfolio values dropped below the level where they could meet their goals.

Using a portfolio worth $500,000 and a home value of $250,000, among other assumptions, the researchers found that using a reverse mortgage’s line of credit significantly improved the chances the portfolio would last through the retiree’s lifetime, because it reduced the risk of having to sell investments when they had fallen in value.

Tapping home equity could lower tax bills. Some retirees pay off their mortgages with taxable withdrawals from their 401(k) or other accounts. Yet they might be able to lower their income taxes by using reverse mortgages to pay off their traditional mortgages, Mr. James says, if they have substantial equity. That means they wouldn’t need to withdraw as much tax-deferred retirement savings, which are subject to income tax and can bump retirees into higher tax brackets.

Plus, without investment distributions needed to make mortgage payments, they might be able to keep their overall incomes under the income threshold at which Social Security retirement benefits are taxed, Mr. James says.

He also is looking at using reverse mortgages as a “bridge” to Social Security, allowing retirees to delay taking Social Security and increase the size of their monthly payments—and those of a surviving spouse—down the road.

Consult an expert. Before you start talking to lenders, consider getting advice from a reverse-mortgage counselor certified by HUD to learn more about the options and mechanics. The National Council on Aging and other nonprofit groups sometimes offer such counseling, often at reduced rates.

There is a directory of reverse-mortgage counselors at hud.gov. Click on “Talk to a Housing Counselor” and then “Search online for a housing counseling agency near you.”

Keep the kids in the loop. When Mr. James broaches the idea of a reverse mortgage with clients, “the first thing they do is wrinkle their nose,” he says. One big reason: Many parents want to leave their home, often their biggest asset, to their children as their inheritance.

Mr. Salter acknowledges that leveraging the family home can be “a touchy subject.”

Still, he contends that many adult children “don’t really want the house” and that they are eager for their parents to use their assets to have “a better rest of their life.”

Besides, Mr. James says, “you still have costs associated with selling the house. You may not get as much as you think you’re going to.”

“Using a reverse mortgage allows for a little more diversification,” meaning retirees could leave other investments with potential for better returns to their families, Mr. James says.

“My first answer, when people ask how to approach the kids, is to ask them if they have an extra room in their house for their parents,” Mr. Salter says.

 

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Retirement Planning in the Age of Longevity

To the degree that people reach old age mentallysharp, physically fit, and financially secure, the problems of individual and societal aging fall away.”
— Laura L. Carstensen, Founding Director
Stanford Center on Longevity

reverse mortgage news

Amara Rose   November 19, 2013

According to a recent Stanford Study on planning for retirement at a time when we’re living longer than ever before, confidence in the ability to retire comfortably — or even to retire at all — is at a new low. Pitfalls include:

  • Failing to plan for retirement
  • Underestimating expenses
  • Underestimating the number of years they will be retired
  • Retiring too early
  • Failing to save

The biggest challenge is failing to plan for retirement at all, researchers say. Only a third of adults in their 50s have ever tried to devise a retirement plan…and only two-thirds of those who have tried have succeeded.

Even among those who do save, fear of limited resources tops the list of retirement concerns. According to a Bank of America Merrill Lynch 2013 Workplace Benefits Report, in a nationwide survey of more than 1000 employees from companies of all sizes:

  • 80% experienced an increase in health care costs in last two years (this may change under the Affordable Care Act)
  • 56% are saving less for retirement as a result
  • 85% feel they’re not saving enough
  • 60% believe it will be “very difficult” to ever save enough to support their standard of living once they retire
  • 79% would give up 5% or more of their salary if it meant having reliable income to help them live comfortably during their later years (38% would give up 10% of their salary — or more).

Though neither research report mentions reverse mortgage as a viable option for older adults once they reach retirement age, given the monetary concerns now facing those in late middle age or nearing retirement, this group appears to be a ripe market to consider the possibility, assuming someone owns a home with sufficient equity to qualify.

Yet continuing to earn isn’t the only reason for seniors to postpone retirement, says U.S. News & World Report, which suggests there are a number of good reasons to retire the idea of retirement for a while yet, such as:

  • Enjoying one’s job. While boss-bashing makes for humorous cartoons and water cooler conversation, people who love what they do need not retire just because they reach a certain age. Boomers, especially, are aging (and perceive aging) much differently than previous generations. A professional hair stylist, for example, is still booked months ahead because she takes time off to travel. At 67, she has no plans to retire anytime soon.
  • Improved health. Contrary to popular belief, working longer may actually enhance later life health: one study of nearly half a million French workers found that every additional year of work before retirement lowered the risk of dementia 3.2 percent.
  • Marital accord. Women have long maintained that once their husbands retire they’re underfoot all day and at loose ends, which can wreak havoc on a marriage. The longer at least one partner continues working, the better it may be for marital harmony. The extra income is a bonus.

By balancing data on the necessity of planning for retirement with the positives about continuing to work, you can present a more informed picture to potential reverse mortgage prospects to help them make the best possible decision for a secure future in the age of longevity.

About the author: Amara Rose View all posts by Amara Rose is a personal and business coach with a broad background in health and positive aging. She holds a social welfare degree with a gerontology emphasis from Penn State, and has written extensively about senior housing, elder health and nutrition, lifelong learning, and the spiritual dimension of aging. A seasoned marketing copywriter, Amara has wordsmithed everything from blogs to brochures to web content. Contact Amara at amara@liveyourlight.com to learn more.
 

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A great reverse mortgage idea: Take a credit line now

Money in home 1August 22nd, 2013  |  by Elizabeth Ecker Published in Reverse Mortgage

I’ve got a financial proposal that is probably going to surprise you. Take out a reverse mortgage at age 62, even though you don’t need the money. In fact, take it especially if you don’t need the money. There will never be a better time. Terms will change in October, but the light is still green for people who want to use the strategy described here.

Reverse mortgages are called Home Equity Conversion Loans (HECMs). They’re designed to provide you with cash at a later age, to help pay your bills if your other savings run out. Normally, the smart play is to wait until your mid-70s or early 80s to take the loan. For some readers, this remains the right choice, as I’ll explain below.

But there’s a valuable new opportunity at hand, for borrowers who don’t need extra money now. You borrow as early as age 62 and take the mortgage in the form of a credit line instead of all-cash. You can borrow against the credit line at any time, but you don’t have to take the money now. More important, this credit line grows every year – greatly increasing your borrowing power in the future.

Before I go any further, let me give you some HECM facts:

At present, the credit line comes with one of two adjustable-rate loans – the HECM Standard, which provides a larger loan, and the HECM Saver.

With HECMS, you don’t have to make monthly payments, as you do with a regular loan. The mortgage doesn’t come due until you leave your home permanently. When the house is finally sold, the proceeds go first to repay what you borrowed, plus the accumulated interest. If there’s money left over, it goes to you or your heirs. If the house sells for less than the loan amount, the Federal Housing Administration, which insures HECMs, covers the lender’s loss.

Why take a HECM now? Because mortgage interest rates are so remarkably low. The lower the rates, the more you can borrow against your home equity. If interest rates rise, five or 10 years from now, you won’t be able to borrow nearly as much.

As an example, take a mortgage-free house worth $300,000. At this writing, a 62-year-old could get a $152,658 credit line on a HECM Standard, at an interest rate of 4.07 percent (including the mortgage insurance premium). If rates rise by 3 percentage points, you could borrow only $77,659. With a Saver ARM, which charges lower fees, you could borrow $131,029 today but only $47,329 if rates rise go 3 points higher..

But – and this is a big but – borrowers should not take out the full amount in cash. You’d be leaving nothing to help pay your bills in your older age. If you’re a spender, don’t take a HECM until your mid-70s or 80s.

If you won’t spend all the money now, a HECM credit line gives you tremendous financial flexibility. You owe interest only on the amount you actually borrow. For example, if you use $10,000 to take a trip, interest is charged on that modest amount, not on the entire credit line.

The magic in a HECM credit line is that your borrowing power isn’t fixed, says Jack Guttentag, founder of Mtgprofessor.com, a comprehensive mortgage information site. Your available credit rises every year, by roughly the mortgage interest rate.

For example, take that Saver $131,029 credit line. If mortgage rates plus insurance stay at today’s 4.07 percent , your borrowing power will rise to $196,710 10 years from now (assuming you’ve taken no money out). On the Standard, you could get as much as $229,182. The higher rates go, the more you can borrow.

As for the HECM’s upfront fees, I consider them worth it. They let you nail down a large pool of future borrowing power, at a time when inflation will have driven your expenses up. Our sample HECM Saver would cost about $5,771 and the HECM Standard, about $11,741. The fees can be rolled into the loan.

For a quick look at how much you might be able to borrow with a HECM, check the calculator at reversemortgage.org.

So what’s happening in October? The government will merge the Standard and Saver into a single program, says Peter Bell, head of the National Reverse Mortgage Lenders Association. Limits will be placed on the amount of cash a borrower can take out in the first year. But you’ll still be able to take the maximum in a credit line. The fee might be a tad higher but all the benefits will still be there.

 

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Reverse Mortgage Myths

ReverseReview.com | Written by Pete Engelken | Mar 2012

A record nHouse-safe.jpgumber of people are entering retirement as the baby boomer generation approaches 65 years old. Between 2010 and 2030, the retiree population is expected to increase by 75 percent (from 40.2 million to 71.4 million).1  While this generation of retirees is healthier, more active and living longer than ever, many retirees are seriously unprepared economically for the financial requirements of retirement.

Over the past 20 years, we have seen a fundamental shift in how Americans prepare for retirement. In the past, the retirement income formula included three pillars: (1) Social Security, (2) employer provided and –defined benefit pension plans and (3) personal savings. Today, all three of these pillars are under stress. Our Social Security program is over-burdened and in desperate need of change to ensure its future health. Employers, once the guarantors of secure retirement for loyal employees, now have shifted retirement savings risk to individuals by replacing the previously defined benefit plan with newly defined contribution plans such as the 401(k). And responsible American savers have been hit with one of the worst investment decades since the Great Depression. To further complicate matters, many retirees of this generation are faced with costly maintenance and health care responsibilities for their own aging parents, who are also living longer.

Across all income levels, retirees are at risk of no longer being able to sustain their pre-retirement lifestyles. Based on the National Retirement Risk Index (NRRI), the majority of retirees surveyed face retirement risk. Five out of 10 high-income retirees are at risk of financial stress, while this number jumps to seven out of 10 for low-income households.2

Although these statistics sound bleak, the good news is that many options and viable solutions do exist to help people improve their chances of successfully achieving their retirement income goals and financial security. To help successfully navigate the retirement planning waters in this environment, one needs a comprehensive retirement plan that considers all available asset classes and resources, including among other possibilities, cash, fixed income, equities, guaranteed income and personal home equity. In fact, accessing home equity through a qualified reverse mortgage should be considered by retirees and financial planners in the overall retirement equation. Based on a 2010 Boston College study, when a reverse mortgage is considered in the equation, retirement risk may be reduced across all income segments.3

This is great news for Americans 62 years and older who collectively have more than $3 trillion of their wealth accumulated in the form of home equity.4 Home equity is too large an asset class for seniors and retirement planners to ignore when devising an individualized retirement strategy. When appropriate, there are two primary ways to unlock accumulated home equity in a personal residence: (1) sell the home or (2) borrow against the stored wealth. The first option, selling a home, may not be a preferred strategy for many seniors who often have deep emotional and physiological attachments to their homes and communities. In fact, 88 percent of seniors5 say they want to “age in place” and continue to live in their homes for as long as they can. A reverse mortgage can be a viable and affordable financial option for these retirees, who can gain access to additional cash flow while they continue to live and enjoy their home.

Over the years, I have come to know many financial planning professionals who do consider home equity as part of the retirement planning process when developing financial strategies with their clients, including clients of moderate to high incomes. These planners really understand the reverse mortgage product and its potential benefits and consider it a valuable alternative or supplement to other income sources in a sustainable retirement plan. However, a surprising number of financial and retirement advisors do not consider the potential benefits of a reverse mortgage and do not educate their clients on reverse mortgages because of basic misperceptions, confusion or general lack of product knowledge. So, what are financial advisors’ top misconceptions about using reverse mortgages?

1. A reverse mortgage should be introduced as a last resort.
I’ve had many conversations with financial planners who say they have clients who will get a reverse mortgage… in a few years. These advisors and their clients think about accessing home equity only after other assets are reduced. However, many of us in the reverse mortgage industry suggest that by waiting until such a late date to consider the use of a reverse mortgage, the planner may be missing some smart and creative planning opportunities that could help maximize the value of the client’s other retirement income resources, including Social Security benefits, retirement savings assets and pension plan distributions. In addition, home equity distributions may have advantageous tax consequences, which could result in numerous income tax planning benefits depending on the client’s individual situation. I will address a few of these potential planning opportunities later in the article. Further and perhaps more importantly, there is potential risk in waiting too long to consider the home equity option. Over time, the home equity cushion in a retiree’s home could decrease, as we have seen with recent depreciating home values.

Another risk is that the current government-sponsored and proprietary reverse mortgage programs may not always be available, and interest rates could begin increasing once again. Conversely, if better opportunities come along in the future, refinancing a reverse mortgage is an easy and affordable option.

2. It’s too expensive to do a reverse mortgage.
Too expensive compared to what? For this statement to make sense, we would need to compare a reverse mortgage to a similar alternative or substitute product. Yet I’m not aware of any other financial product that contains all the features, benefits, flexible payment options and consumer protections that the HECM reverse mortgage offers. This product was specifically designed to provide safe access to a percentage of a senior’s home equity by converting it into retirement income, with a government guarantee that the loan will be nonrecourse and that neither consumers nor their heirs will ever be personally liable for the debt regardless of whether the loan balance exceeds the home value when the loan becomes due and the home is sold. One of the most undervalued elements of the HECM program is the possibility for the consumer to request a line of credit or request equal periodic disbursements throughout the life of the loan. This is a very powerful feature, and one that provides flexibility and numerous financial planning opportunities. Many financial planners are unaware of the newest and lowest cost product in the HECM family, the HECM Saver, which nearly eliminates the initial closing costs and the initial mortgage insurance premium!

3. It’s better to sell and rent or downsize than to take out a reverse mortgage.
Not necessarily. Assuming that the client is not attached to his or her home, it’s nonetheless important to consider that selling and moving carries non trivial hard costs and opportunity costs. Selling and moving transaction costs can easily be $35,000 for a $500,000 sale assuming, 6 percent realtor commissions for the sale transaction and another 1 percent for moving expenses. As a renter, there is also a good chance that multiple moves will be required over time. If the senior elects to rent, he or she will have sold a valuable asset with the potential for appreciation in exchange for the inherent inflation risk associated with rental costs. If the client buys another home, there will be additional transaction costs incurred in the purchase, which takes another bite out of the home equity. After considering all the transaction and relocations costs, the net benefit to the consumer through a reverse mortgage could exceed the net benefits of other real estate transactions. With a reverse mortgage, homeowners (and heirs) retain any remaining home equity, after the loan is paid in full, at the time of sale. Moreover, the heirs have the option of either keeping the home or selling the home. Home retention and access to equity could also result in significant tax benefits to the homeowner. Interested seniors should consult with their tax advisors as the potential tax advantages exceed the scope of this article.

4. A home equity loan is better for my clients than a reverse mortgage.
Not necessarily. Traditional home equity loans and HELOCs typically require strict credit and income levels for approval by the lender, and they come with required monthly mortgage payments. Those monthly payments create a financial headwind if the client’s primary objective is to generate more cash flow. Furthermore, in the current economic environment, it is much more difficult for consumers to gain credit access to home equity loans, particularly for seniors facing reduced or limited incomes. In addition, most reverse mortgages have a nonrecourse clause, designed to prevent the client or his or her estate from owing more than the value of the home when the loan becomes due and the home is sold.6 There are no prepayment penalties with an FHA HECM reverse mortgage.

5. It’s legally challenging to offer reverse mortgages.
With the legislative and regulatory changes during the past few years, mortgage lenders and financial planners are more cautious than ever before in considering the cross-sale of financial services products and reverse mortgages, to ensure that reverse mortgage originators and financial planning professionals are not violating state and or federal laws.With properly designed safeguards and firewalls, reverse mortgage professionals can easily work with professional financial advisors to devise sound retirement and estate plans. It is important that both parties understand the state and federal laws and regulations, and that the lender is knowledgeable in this area and has established processes, procedures and compliance guardrails. Seniors, mortgage originators and advisors should avoid working with any financial planner who seeks compensation related to originating a reverse mortgage. With six out of 10 retirees dependent on financial advisors for retirement planning advice,7 it is critical as an industry that we effectively engage and educate planners on the potential benefits of reverse mortgage solutions for their clients.

For example, reverse mortgages may be used to help avoid retirement planning mistakes involving (1) inappropriate and inefficient utilization of Social Security benefits and (2) excessive distributions from retirement savings causing unnecessary and rapid draw-down. Using a Reverse Mortgage to Help Defer Ta king Social Security Today, record numbers of people are electing to take Social Security income distributions at age 62, which is the earliest age possible. Many financial planners suggest that healthy seniors delay as long as possible before starting their Social Security benefits, up to age 70. For example, a person who would receive Social Security benefits of $1,000/month at a full retirement age of 66 would get only $750/month if he or she claimed benefits at age 62. If instead, Social Security benefits were deferred until age 70, the same person would receive$1,320/month.8 This, however, is easier said than done. People are electing to receive their benefits early because they need the income to sustain their quality of life. That’s where a reverse mortgage can help. A senior can tap into home equity through a reverse mortgage to create an “income bridge” so that he or she may defer taking Social Security benefits until age 70. At age 70, the client can stop taking monthly distributions from a reverse mortgage and start taking Social Security benefits, which will then have nearly doubled for the rest of his or her life. Because any existing mortgage payments are also eliminated when taking out a reverse mortgage, there can be additional cash flow benefits for seniors.

Using a Reverse Mortgage to Stretch Retirement Savings Accounts
Many retirees have a very difficult time keeping their distributions from retirement savings accounts at a sufficiently low level to ensure their savings last throughout their lifetimes. Unexpected life events or health issues often come up, and low interest rates and poor equity market performance have resulted in low investment returns over the past several years.

One strategy for seniors and planners to consider is reducing the distribution from retirement savings each month and replacing it with a reverse mortgage home equity distribution from the HECM line of credit. By simply reducing the performance dependency of a single asset class, and adding a distribution from an additional asset class, the longevity of the retirement savings account can increase. This may help reduce the risk to the client of prematurely running out of money and depleting the retirement funds.

Avoid Reverse Dollar Cost Averaging
A reverse mortgage may also help seniors improve their overall portfolio returns over time. Many of us have heard about the benefits of dollar cost averaging while saving for retirement. The concept is based on a simple principle: If you invest a set amount in regular intervals throughout your working life, you’ll invest more of your funds at a lower average cost as the market moves up and down. In retirement, when taking systematic distributions from a retirement account, dollar cost averaging works in reverse, meaning you may withdraw more funds at lower values by selling more at lower prices. Assuming retirement savings are invested in the equity markets, one way to help avoid this phenomenon is to strategically use a reverse mortgage to take home equity distributions in lieu of retirement distributions during years following very low or negative returns in the equity markets. This gives your retirement savings a chance to rebound in future years when equity market gains return.

Reverse mortgage originators are well positioned to work in local communities and partner with financial planners to provide education on the benefits of a reverse mortgage. Remember that as a reverse mortgage origination professional, you are the expert on these products, and financial planners will need your assistance in determining whether a reverse mortgage fits into an individualized client financial objective or retirement plan. We are seeing more and more clients being referred by financial planning professionals, and this trend will likely continue as more baby boomers enter their retirement years. Please remember to seek detailed advice from a tax professional or accountant as necessary.

Keep in mind that you want to work with reputable, fee-based financial planners and work with a reverse mortgage lender who has well-designed policies, procedures and the regulatory guardrails to help protect the client, the professional financial advisor and the reverse mortgage originator.

Footnotes:
1. Retirement Population Statistics: US Census Bureau, US Interim Projections, March 2004 Table A.
2. NRRI Fact Sheet No1, March 2010. Center for Retirement Research at Boston College.
3. Home Equity Statistics: National Reverse Mortgage Lenders Association (NMLRA/Risk Span RMMI Q1, 2011).
4. Statistics on Aging in Place: AARP Home and Community Preference Survey, November, 2010.
5. Federal Trade Commission. Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity.
6. INFRE, Society of Actuaries, LIMRA Report. 2011. The Financial Recovery for Retirees Continues.
7. SSA Publication No. 05-10147, ICN 480136, July 2008.

 

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Lower Cost HECM Means Better Suited For Short Term Goals

Cash at Home: Two recent government moves could make reverse mortgages cheaper and easier for older homeowners to understand. The loans, which generally let people 62 or older convert their home equity into cash, traditionally have had high closing costs and have been most useful for people planning to stay in their homes for the long haul. But a new federally backed product, the HECM (Home Equity Conversion Mortgage) Saver, has cut the upfront mortgage-insurance premium to 0.1% from 2% of the property’s value. The change makes the product better for people with short-term needs, says Barbara Stucki, vice president of home-equity initiatives for the National Council on Aging, a Washington, D.C., advocacy group.

Also last month, the Department of Housing and Urban Development began requiring all HUD-approved reverse-mortgage counselors to give their clients the aging council’s 28-page consumer booklet on reverse mortgages, walk them through a new “Financial Interview Tool,” and offer to see what other assistance might be available using the council’s BenefitsCheckUp program ( benefitscheckup.org ).

To learn more, see the aging council’s booklet “Use Your Home to Stay at Home,” at ncoa.org/reversemortgagecounseling.

 
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