It’s a safe bet that any reverse mortgage loan officer will stress to you that the loan is not for everyone – and just like any financial product, that’s true.
But for older homeowners with sizable equity and no intention of relocating in retirement, the loan can make perfect sense. So much sense, in fact, that financial advisors are increasingly embracing the loan’s use as part of a greater financial strategy in retirement.
And here’s one compelling reason why:
When a homeowner over the age of 62 refinances their traditional mortgage into a reverse mortgage, they can make their mortgage payments optional. For those who are on the brink of retirement and staring down the barrel of a limited, fixed income, this could make all the difference.
Shelley Giordano, chair of the Funding Longevity Task Force, said that retirement income experts demonstrate that it’s all about the ability to weather volatility in the stock market, making the most of your available assets so that you can enjoy a long and comfortable retirement.
“The idea is that when your stock portfolio is doing well, you can go ahead and make the monthly payments on your reverse mortgage, and if your portfolio doesn’t have positive returns, stop making those payments,” Giordano explained. “The advantage is that it allows the borrower to have some control over his cash flow.”
Another added bonus?
When a borrower makes payments on a reverse mortgage – whether it’s the full payment or just the interest payment – they are contributing to the growth of a line of credit, which is available to draw upon at any time should an emergency arise.
This could be a gamechanger for the increasing number of older Americans who are carrying mortgage debt into retirement.
Researchers at the Center for Retirement Research at Boston College revealed that older households are more likely to hold a mortgage, and that they have larger mortgage balances, than in previous decades. The number of homeowners 65 and older with a mortgage grew 39% in the last 15 years, their study uncovered.
The situation has led the Consumer Financial Protection Bureau to state that this increase in mortgage debt among older homeowners is “threatening the retirement security of millions of older Americans.”
Could a reverse mortgage provide an answer?
For those who would consider it, the good news is that it’s gotten cheaper to use the loan for this purpose.
While changes to the reverse mortgage program issued by the Department of Housing and Urban Development in late 2017 have largely dampened the success of the program, they favor those who want to use a HECM to replace a large mortgage debt.
Under the revised guidelines, both initial and upfront mortgage insurance premiums decreased for those extracting greater than 60% of their proceeds in their initial draw – which one is likely to do when using the loan for this express purpose.
And, changes made to the principal limit factors that calculate the maximum available proceeds have ramped up lender competition, driving margins down. Whereas margins for reverse mortgage loans used to hover close to 3%, they have been holding steady just under 2%.
Combined, these factors have shaved thousands off the expense of taking the loan, making it that much more appealing for those considering its use.
Giordano said the changes make a strong case for why middle-class Americans should consider leveraging their housing wealth with a HECM to support their retirement.
“If you have a regular mortgage, you still have to make those payments come hell or high water, and that can be a problem,” she said. “Fewer fixed expenses in retirement means a greater ability to withstand volatility. It just makes sense.”