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Reverse Mortgages- Do they have a place in your Financial Plan?

Many people have heard about reverse mortgages.  They are hyped on TV, radio, magazines and many brokers recommend them aggressively.

As a financial planners we have considered them as a possible solution for those who are concerned about outliving their resources.

The primary issue we saw as a negative was the very high cost.  Typically fees to acquire a mortgage were often well over $10,000.  Additionally, the interest rates are higher than normal mortgages.  If your plan is to leave a legacy.  Know that your heirs will not receive your house unencumbered.  If you live a long time they may not receive anything at all.

Drawbacks as stated above, limited the effectiveness of the program for many.

Today things are changing primarily as it relates to the fee equation.  Some lenders today have brought the cost down as low as $125.00.  This is really good news!

The other issues still apply.  However, there are some creative ways to use home equity that may be appealing for some.

We have been following studies published in The Journal of Financial Planning by John Salter, Ph.D., CFP®, AIFA®; Shaun Pfeiffer; and Harold Evensky, CFP®, they are  linked below, show some advantages of using these tools with in an investment strategy.  While the article is technical in nature, for the average person, financial planners have found this information to be very enlightening. 

https://www.onefpa.org/journal/Pages/Standby%20Reverse%20Mortgages%20A%20Risk%20Management%20Tool%20for%20Retirement%20Distributions.aspx

We now feel these mortgages can be considered as a viable financial planning tool.

For a more consumer focused review of reverse mortgages see the link below from Wikipedia.

https://en.wikipedia.org/wiki/Reverse_mortgage

The most obvious benefit would be to allow a person to live in their house for the rest of their lives, draw a monthly paycheck from their home equity.  The homeowner would be required to pay for property taxes, insurance and upkeep of the home.  The loan would accrue interest that would be paid off after the homeowner passed away.  If they home is owned by a couple the loan is funded through the second death.  Note that one of the homeowners must be at least 62 years old in order to qualify for reverse mortgage.

There are other potential uses to consider as well.   Suppose you have an existing mortgage on your home.  You are making payments.  If you have at least 50% equity you could use a reverse mortgage to retire the debt and not have to make any more mortgage payments.

You could also set up a Home Equity line of Credit.  Here you could use the equity to defer withdrawals from IRA’s, fund health expenses, and allow for stocks to recover from a down stock market, reduce cash allocations in an investment portfolio or allow individuals to delay taking Social Security, thereby potentially increasing their payout.  Another nice feature is that all distributions from equity are not considered as taxable income.

As you can see there are a variety of options to consider.  The benefits may help some to live a more comfortable retirement.  Like any financial choice the benefits must be weighed against the downsides.  Each situation needs to be evaluated carefully.  As fee only planners we can help shed some light on the topic for those who have questions.

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Troy Daum
Troy Daum

Troy Daum, CFP® founded Wealth Analytics in 1999. He has more than twenty five years of experience in financial services and has played a visible role in building the financial planning management profession in San Diego. He served as the first President of the San Diego chapter of the Financial Planning Association. Troy specializes in business succession planning and retirement income planning.

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