February 18th, 2019 8:42 AM by Jackie A. Graves, President
The loan can help eliminate a massive burden for senior
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
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
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
Combined, these factors have shaved thousands off the expense of
taking the loan, making it that much more appealing for those considering its
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.”
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