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If ever you want to clear out a room, start a conversation about reverse mortgages. You’ll have the hors d’oeuvres and then some to yourself.
But folks shouldn’t shy away from talking about a tool that, in the right circumstances, could be used to improve their financial security in retirement.
So said Don Graves, founder of the Housing Wealth Institute, in a recent Decoding Retirement podcast (see video above or listen below). “It’s not spooky,” he said. “It’s not dangerous. … It’s just a mortgage.”
According to Graves, a reverse mortgage, and specifically the Home Equity Conversion Mortgage (HECM), is a federally insured loan for retirees ages 62 and up that allows them to convert a portion of their home’s value into tax-free dollars without giving up ownership or making monthly mortgage payments.
“It’s just a home equity loan for those aged 62 or older that gives them access to dollars without the burden of making a mandatory monthly principal and interest payment,” he said.
Reverse mortgages have a long history. Originating in 1961, they gained US federal government backing in 1988 through the HECM program. Internationally, these financial products are marketed under more approachable terminology. In the United Kingdom, they’re commonly known as “lifetime mortgages” or “equity release” products, terms that more transparently describe their function of converting home equity into accessible funds during retirement while allowing homeowners to remain in their residences.
According to Graves, about 98% of reverse mortgages in the US are HECMs, which are insured by the Federal Housing Administration under the US Department of Housing and Urban Development.
And these federally backed loans provide important consumer protections and standardized terms that have helped establish reverse mortgages as a legitimate financial planning tool for qualifying homeowners.
Cora Gates, 68, poses for a portrait outside her family home in Ferguson, Mo., on July 23, 2015. (Reuters/Adrees Latif) ·REUTERS / Reuters
To be sure, reverse mortgages aren’t for everyone.
Graves said that of the 16,000 people he’s talked to over the past 26 years in the business, only 3,000 reverse mortgages went forward. The resource may not make sense for those who don’t plan to live in their home long-term, don’t have a strategy or need for the funds, and don’t need additional income sources.
However, certain types of homeowners should consider a reverse mortgage, Graves said. They include homeowners ages 62-plus who plan to stay in their home long-term; those looking to increase cash flow, reduce risks, preserve assets, or add funds to retirement savings; and people who want to eliminate a mandatory monthly mortgage payment to free up cash flow.
According to Graves, retirement in the future is going to be more expensive and less predictable. He explained that most retirees rely on three traditional buckets: employment, investments, and income from Social Security and/or a pension. “And those have to last them as long as they do,” he said.
Graves said that when confronted with the critical question, “Is that going to be enough? Is that going to make it?” most honest retirees say, “I don’t think so.”
That’s why another resource that 87% of American retirees possess — their home equity — could be the answer to improving retirement security.
“You’ve got a fourth bucket,” Graves said.
“If we could turn your home into a reserve fund that was growing, could that increase your cash flow, reduce risks, preserve assets, improve liquidity, or even add new dollars back to your retirement savings?” he added. “The modern reverse mortgage is designed to do those five things.”
According to Graves, a reverse mortgage loan amount is based on the age of the youngest spouse, home value, and projected interest rates. The line of credit grows over time and is currently around 7%, he said.
Some common uses of a reverse mortgage include eliminating existing mortgage payments, creating a growing line of credit for future needs, and supplementing retirement income. Retirees may also seek out a reverse mortgage to establish a reserve for healthcare and long-term care needs, aid in tax management strategies, and create a volatility buffer for their portfolio during market downturns.
To keep the reverse mortgage in place, homeowners must continue to live in and maintain the property, pay property taxes, and maintain homeowners insurance.
The loan becomes due when the last surviving borrower moves, passes away, or enters a care facility for 365-plus consecutive days.
Of course, reverse mortgages are not without costs, including the up-front costs of mortgage insurance premiums, origination fees, and standard closing costs.
Of note, consumer protections are also in place, including mandatory counseling with an FHA-approved agency. Plus, the reverse mortgage is a non-recourse loan, meaning borrowers will never owe more than the home is worth.
Graves said it’s prudent to set up a reverse mortgage line of credit as early as possible if you’re planning to stay in the home, due to its compounding growth effect.
He outlined six other tips for determining whether a reverse mortgage is right for you:
Consider a reverse mortgage as a tool in your retirement planning, not as a last resort.
Consider using a reverse mortgage to eliminate existing mortgage payments and free up cash flow.
Consider using a reverse mortgage as a “volatility buffer” to avoid withdrawing from investments during market downturns.
Explore using a reverse mortgage for tax management strategies.
