Financial planners, who once disparaged reverse mortgages, are beginning to recommend them for clients as a proactive retirement income strategy, rather than a last-ditch effort to remain in a house.
The loans for seniors age 62 and up can help individuals and couples avoid portfolio withdrawals when stocks are down, buy a new home for retirement, or create an income bridge between early retirement and the start of Social Security benefits. And because borrowers can choose to pay down the mortgage, resulting in a mortgage interest tax deduction, they can even help offset taxes on required minimum distributions from retirement accounts that must begin after age 70 1 / 2.
Marie and Jerry Watson used one last fall to buy a home in Florida. At age 64, Jerry had recently downshifted from military and corrections careers in Alaska and was moving into part-time teaching roles. Both he and Marie have adequate retirement funds from their careers, including Jerry’s military pension, and won’t need to count on home equity if one of them has to move to a nursing home, he said.
So they put about $247,000 down on a roughly $500,000 home in Lake Wales, Fla., using the Federal Housing Authority’s reverse mortgage program, known as the home equity conversion mortgage, or HECM, program.
Borrowers can also take annuity-like equity payments, called tenure, over their lifetimes or establish lines of credit, among other HECM options.
As long as they maintain the property and stay current on property taxes, the Watsons don’t owe payments on the home. When they move or after both spouses pass away, the loan and the accrued interest is repaid, with any remaining home equity going to the homeowners or their estate. If the amount owed is greater than the value of the home, the lender takes the home but the estate is not charged more than the home value. (Check out the National Council on Aging website, ncoa.org, and hud.gov).
“It took a lot of pressure off of us,” Jerry Watson said. The loan allowed the couple to buy their dream retirement home on a golf course, essentially doubling their budget without worrying about monthly mortgage payments, he said. “It was like going to a car dealership after saving up for a Kia and learning you could drive home in a Cadillac.”
While the strategy is working for the Watsons so far, it’s important to understand the risks and the costs. Chris Bruser, with Retirement Funding Solutions LLC, sold the reverse mortgage to the Watsons, but has warned others it might not be right for them. Someone with few assets outside the home could exhaust the equity early, and if the homeowner falls behind on taxes or upkeep, they could face eviction.
“Unfortunately, if someone is already in crisis mode, I can’t really help them,” Bruser said.
The psychology of the transaction is also important, said Jonathan Guyton, principal of Cornerstone Wealth Advisors in Minneapolis. Think of reverse mortgages as a defensive strategy for your overall retirement plan, he suggests. That could mean buying a retirement home with half the assets you might otherwise commit to housing and investing the difference, or securing a line of credit that grows with inflation over time and can act as longevity insurance.
“It’s important for retirees to understand why they are purchasing these and what they are paying for beyond what is accomplished with a traditional home equity line of credit,” he said. “Imagine what a pre-retiree hears if their adviser says something like, ‘Your retirement still looks really solid, but we think you should put a reverse mortgage in place just in case that ever changes.’”
Fees, closing costs and mortgage insurance can add up to several thousand dollars on a typical loan, not to mention the accruing interest and ongoing mortgage insurance premiums of 1.25 percent annually. Paying those fees can be worth it to ensure a senior can remain in a home, Guyton said, but might be less so if the goal is simply enabling more discretionary spending.
“The environment has changed pretty considerably” regarding reverse mortgages since federal regulations over the last few years expanded how much homeowners could borrow, cut some of the fees and bolstered consumer protections, said Amy Ford, NCOA’s senior director of home equity initiatives. But there are still risks, and the group encourages people to ask a lot of questions during the required counseling sessions that borrowers must participate in to complete the loan process. “Seniors who burn through that equity too quickly could find themselves in a difficult position,” she said.