Because a Home Equity Conversion Mortgage (HECM) line of credit cannot be canceled unlike regular lines of credit, a reverse mortgage can provide access to an “invaluable tool” for income planning regardless of a person’s wealth and can help to preserve assets for a spouse or other heirs.
This is according to Guy Paredes, a professional financial planner specializing in what he describes as “retirement readiness” through his firm Rockdale Financial Services based in New Jersey. Paredes describes his journey of understanding the potential planning benefits a reverse mortgage can provide to clients in a column he authored for “the Register,” the official magazine of the International Association of Registered Financial Consultants (IARFC).
“In my recent studies on the subject, I learned just how valuable engaging this strategy can be when utilized early and during retirement,” Paredes writes in his column. “Notably, no payments are required so cash flow is not diminished.”
Paredes goes on to list 12 potential uses of a HECM in retirement planning over the course of the column’s remainder, including using it to pay off a current mortgage and bolster existing cash flow; using it to cover “essential retirement expenses” including real estate taxes and utility bills; as well as using a HECM line of credit to avoid sequence of returns risk if the market drops. Financial planners including Dr. Wade Pfau have previously described this methodology as a way to avoid tapping investments until the market recovers.
A reverse mortgage can also be used in lieu of Social Security benefit payments if someone wants to delay taking such benefits until they are older; and Paredes also indirectly cites the HECM for Purchase (H4P) program to use a reverse mortgage to assist in the financing of a new home purchase.
While recognizing that leveraging the home as an asset may be a difficult decision for some, it can also be shortsighted to view the home as a “dead asset” particularly if it may allow unconventional cash flow options to be explored, he says.
“For many individuals their home is one of their most valuable assets and it shouldn’t be considered a ‘dead asset,’” he says. “[There are] great ways to utilize this asset and leverage it to your best advantage.”
While not everyone will qualify for a HECM and certain restrictions on such loans exist among a select number of Homeowners Associations (HOAs), it is still a worthy option to explore for those able or willing to go through the required educational processes with a reverse mortgage counselor as approved by the Federal Housing Administration (FHA), he writes.
Find more information on the latest issue of the IARFC “Register” magazine.
