Should I wait to set up a Reverse Mortgage loan? Many see a reverse mortgage loan as a last-resort option for seniors who want to stay in their homes but have little resources and few options left.
In recent years, a number of retirement experts and financial planners have realized that a reverse mortgage loan can be used to devise a more positive financial outcome in retirement.
Why Wait to do a Reverse Mortgage?
The biggest reason to wait to do a Reverse Mortgage deals with plans for the future. Depending on the value of your home, a Reverse Mortgage can come with high costs. Because of these costs it doesn’t always make sense to do a Reverse if you don’t plan on staying in the home. For the reverse mortgage loan to make sense, the borrower should be committed to remaining in the home for at least three years, ideally using the loan as a means to age in place.
Likewise, if you don’t like the city or home you’re in and don’t plan on staying there much longer it might be better to hold off on doing a HECM reverse mortgage until you do find the city and home you love and want to be in for the rest of your life.
No Reason to Wait?
For those planning to stay in the home, obtaining a reverse mortgage loan through a qualified reverse mortgage broker is all part of a beneficial financial planning tool for senior borrowers in a number of ways.
First, as one of the initial uses of a HECM reverse mortgage, a borrower’s original mortgage indebtedness must be paid off in full, therefore eliminating their monthly mortgage payment and freeing up cash. Clearly a major benefit for a retiree that will be living on a fixed income.
Second, proceeds from a reverse mortgage loan can be used fund expenses and stave off drawing on Social Security or other retirement fund accounts. This maximizes the benefit one gets from Social Security, as the later you draw it, the more money you can access.
Third – and this is the strategy most often touted by retirement planning professionals – borrowers can establish a growing reverse mortgage line of credit to drawn upon when needed.
The idea is to use the credit line as a safety net in the event funds are needed but your stock portfolio or other assets are down. This way, borrowers can allow their assets to rebound, using the reverse mortgage loan proceeds instead to cover expenses.
Wade Pfau, a well-known retirement researcher and professor of Retirement Income at the American College of Financial Services, said studies have proven that using a reverse mortgage as a last resort offers the least benefit.
“For someone who ends up needing [the reverse mortgage loan] as a last resort, they could have surely created more line of credit to help at that point by setting up the reverse mortgage earlier on in retirement and letting the line of credit grow until it is needed,” Pfau explained. “This is why last-resort strategies end up looking the worst in financial planning research about reverse mortgages.”
Jamie Hopkins, director of retirement research at Carson Group, said that a proactive strategy is especially important when it comes to home equity.
“One problem with waiting to deploy home equity toward the end of retirement is that home equity grows more slowly than other investable assets in general,” Hopkins explained. “Most homes just keep pace with inflation and provide no real return over it, and many senior-owned homes actually see a decline in value because seniors don’t always keep up with the newest and best home features and remodels.”
Instead, both Pfau and Hopkins say establishing a HECM line of credit earlier on can help a retiree better manage their resources.
Are Reverse Mortgages only for those older than 70?
The general answer for most of course is no. However, for those younger than 70 a little more planning and strategy should be used when deciding on doing a reverse mortgage loan. People in their 70s and 80s tend to be less transient and less likely to move. But a person in their 60s usually is just entering retirement and has a much higher probability of selling their home to relocate or downgrade.
Cash Flow Planning
If you’ve done some cash flow planning with your financial planner you know that there are certain forms of retirement income such as Social Security Income that increase the longer you wait before drawing. Other retirement assets have specific tax benefits for delaying draws. In either case it makes sense to wait before dipping into these retirement assets but on a fixed income in retirement waiting is not always possible.
With a Reverse Mortgage you can delay taking income from your other sources and live on the equity in your home until a more advantageous time. Establish a line of credit for cash draws when you need them most.
Setting up a HECM Reverse Mortgage Line of Credit Early Makes Sense
Even if a senior doesn’t need the immediate cash flow from a reverse mortgage, setting up a HECM reverse mortgage line of credit early on in retirement is a sound planning decision.
Market Crashes are especially dangerous during retirement years and a sound investment tool can be a true lifesaver. And of course, there are often other unforeseen life issues that can arise in retirement including health and long-term care risks. “The line of credit creates many opportunities to help manage the new types of risks retirees face, such as the amplified impacts of market volatility caused by the sequence of returns,” Pfau said.
“The reverse mortgage can help to protect the investment portfolio from this risk in any number of ways, such as reducing the early retirement distribution rate to make mortgage payments, managing the delay of Social Security benefits, or coordinating portfolio distributions with reverse mortgage proceeds to cover a retirement spending goal,” he added. “It’s all about creating the opportunity for greater line of credit growth by the time it is needed.”
One of the powerful features of a Reverse Mortgage line of credit is that the equity you access from your home is non-taxable so you can draw the money without tax penalties and once the Reverse Mortgage is set up the homeowner is just responsible to continue paying for normal housing expenses such as taxes, insurance, and home owners association fees.
A HECM Reverse Mortgage line of credit loan offers a few unique characteristics which make it one of the most secure and reliable investment tools available including:
- Loan terms are generally based on the value of your home at the time you close your mortgage and cannot be altered by falling home values.
- HECMs can be set up with a Growth Line of Credit where you can make voluntary payments to pay down the mortgage balance and increase funds available to draw in the future. Every penny you pay into your Reverse Mortgage Line of Credit after closing can be drawn back in a revolving feature.
- Money that is available in the Line of Credit is attached to a growth factor that is equal to the combined interest rate and mortgage insurance rate.
Get the Facts and Act Early
So, it’s important to get the facts and act early. And even more important to speak with a qualified HECM reverse mortgage broker.
Setting up a HECM reverse mortgage early in retirement can give you access to the additional cash flow needed to help with unforeseen financial challenges. Talk to your advisor, the cash from a HECM Reverse Mortgage can be the safety net needed when challenges arise.
