Standby Reverse Mortgage Line of Credit: A Retirement ‘Must Have’

When it comes to using a reverse mortgage in retirement planning, there are several strategies that make the standby line of credit feature a “must have” in the eyes of financial advisors and their clients.

That’s primarily due to recent Home Equity Conversion Mortgage (HECM) program changes over the last couple of years, which have changed the way reverse mortgages should be perceived in modern day retirement planning, says Colleen Rideout, home equity retirement specialist at Retirement Funding Solutions.

Launched in January by former Security One Lending head Torrey Larsen, RFS is a company that has roots in collaborating with financial advisors by showing, through academic research, how a reverse mortgage can help retirees fund their longevity. Larsen was instrumental in establishing the Funding Longevity Task Force in 2013 with reverse mortgage industry veteran Shelley Giordano, now the principal of consulting firm Longevity View Associates.

The Task Force is comprised of distinguished reverse mortgage researchers like John Salter, associate professor of financial planning at Texas Tech University; former Mature Market Institute Director Barry Sacks; Tom Davison, CFP; and Wade Pfau, professor of retirement income at the American College—among others.

Since its inception, the group has produced several studies from its members on the practical use of a HECM, and how it fits, as part of a comprehensive retirement plan. It’s this research that has helped “open up a new strategy” in educating non-reverse industry professionals on the merits of HECMs, says Rideout, who regularly teaches continuing education classes on reverse mortgages in her home state of Colorado as well as nationally.

Earlier this month, Rideout presented at the National Association of Insurance and Financial Advisors (NAIFA) 2015 Annual Conference in New Orleans. Her presentation spotlighted the “must have” reverse mortgage line of credit feature to a crowd of financial planners.

“The line of credit strategies are very basic,” Rideout says. “Once you learn—as an advisor or an insurance agent—how the line of credit works, then you can build other strategies on top of that.”

Rideout’s presentation also examined several different strategies a borrower can use the “standby” line of credit feature on their reverse mortgage to complement other their retirement assets.

Research has shown that when using a reverse mortgage in the retirement planning process, rather than using a HECM as a loan of last resort, significantly increases the likelihood of a retirement portfolio’s success.

“What interests advisors is that the line of credit is a hedge against rising interest rates because the growth factor on the credit line rises with interest rates,” Rideout says, adding that the credit line can also hedge against falling home prices.

For example, even if home values fall in the next 10-15 years, the line of credit isn’t tied to property value in the future, so if values fall the credit line is still growing, Rideout says.

The “standby” strategy can help retirees delay drawing from Social Security, avoid dipping into other assets and provide a cash reserve to help weather market turmoil or sudden emergencies like health care costs or home repairs.

“It’s another pot of tax-free money that can be used in any number of ways to provide income, protect assets and provide liquidity in the future,” she says.

Since the HECM program changes in 2013, Rideout has done at least 200 presentations across the country on the topic of reverse mortgages geared toward financial advisors and insurance agents. The purpose: to get in front of financial professionals and show them the changes that have evolved the HECM program to what it is today.

“It’s absolutely a 180 degree mind shift that happens in the classes from when I start to when I finish,” she says.

This year was the second time Rideout presented at NAIFA’s annual conference on the topic of home equity use in retirement. Although she has recognized a growing interest for reverse mortgages among advisors, she admits there is still much more that needs to be done to broaden reverse mortgage education to other stakeholders and professionals working with retirees.

“We have to be able to touch and get into the compliance departments, and get them up to speed on what the reverse mortgage is today—not what it was 10 or even five years ago,” Rideout says.

Rideout notes two common reactions among advisors after learning more about how reverse mortgages fit into a retirement portfolio.

“The first one is: this sounds two good to be true. The second one: why isn’t everyone doing this?” she says. “It all comes back to: you don’t know what you don’t know.”

Written by Jason Oliva

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