Financial Planner: When a Reverse Mortgage Makes Sense for a Borrower

A reverse mortgage is a type of financial product which has the potential to provide real relief in the form of additional cash flow for the right borrower, and should not be overlooked out of hand. This is according to Linda Leitz, a member of the Standards Resource Commission and a Certified Financial Planner Board in a column published by newspaper The Gazette from Cedar Rapid, Iowa.

In her second of two pieces looking at the potential effects of a reverse mortgage for a well-suited borrower, Leitz aims to discern for a reverse mortgage prospect exactly when the “right time” is for such a loan to be seriously explored.

“For a retiree who has a mortgage on their home, if the payment puts a squeeze on money that’s available for other living expenses, a reverse mortgage might relieve the pressure,” she writes. “Depending on the homeowner’s age and the home’s appraised value, a reverse mortgage could pay off the existing mortgage, which would eliminate the house payment. There might even be enough equity to provide a line of credit for the borrower. The line of credit might be set up as monthly payments to the borrower, or provide the ability to draw money as needed.”

The reverse mortgage line of credit is one of the most-cited product features that financial planners describe in explaining the uptick in receptivity that some planners have explained to their audiences over the years. However, if a potential borrower owns their home “free and clear” without the presence of a forward mortgage on the home currently, then a reverse mortgage may still warrant consideration, she says.

“Sometimes a home that has no mortgage is the biggest asset a retiree has,” Leitz writes. “If that household could use a little more cash flow, it might benefit from a reverse mortgage. A lump sum could be invested for future use, or a line of credit could be set up to provide monthly cash flow or the ability to draw funds occasionally.”

The concept of the Home Equity Conversion Mortgage (HECM) for Purchase (H4P) is also explored, a comparatively little-used version of a reverse mortgage that certain loan officers see as a potential path forward for the industry at-large, according to outreach previously conducted by RMD.

“It’s common for retirees to downsize their homes and common for retirees to decide to move closer to family. In these situations, a reverse mortgage can be used to purchase a home,” the column reads. “How large the mortgage can be will depend on the age of the borrower and the appraised value of the home being purchased. Depending on these factors, there also might be a line of credit available on the home.”

Read the second of two reverse mortgage columns written by Leitz at The Gazette.

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