The Top Ten Reasons to Introduce Reverse Mortgages to a Financial Advisor
Steve Resch is Vice President of Retirement Strategies at reverse mortgage lender Finance of America, Conshohocken, Pa.
Financial advisors are crucial in helping clients in or near retirement navigate complex financial landscapes. With seniors controlling almost $14 trillion in home equity and planning for an 80-year lifespan, leveraging home equity to safeguard and enhance retirement plans has become increasingly relevant.
Loan originators who collaborate with financial advisors should understand how reverse mortgages can help address key retirement planning concerns.
What Is a Reverse Mortgage?
A reverse mortgage is a financial product designed for homeowners who are typically 62 years of age or older. It allows them to convert part of the equity in their home into cash without having to sell the property or make monthly mortgage payments. The right of the borrower to remain in the home is contingent on the borrower living in the property as their primary residence, paying property taxes and homeowner’s insurance, maintaining the home, and complying with the loan terms.
With a reverse mortgage, eligible homeowners can access a portion of their home’s equity as cash, a line of credit, tenure payments, or a combination of these, depending on the product selected. The amount borrowers receive depends on their age, current interest rates, and the equity in the home. Borrowers can use their funds at their discretion for almost any purpose, offering an avenue to accessing hard-earned equity without selling the home.
Types of Reverse Mortgages
There are two primary types of reverse mortgages:
Home Equity Conversion Mortgage (HECM): This reverse mortgage, insured by the Federal Housing Administration (FHA), is the most common. It offers several payout options, including a lump sum, monthly tenure or term payouts, a line of credit, and combinations thereof.
Proprietary Reverse Mortgage: These are private loans offered by individual lending companies and may allow for larger loan amounts compared to HECMs. In some states, they are available for borrowers 55 and older. Payout options for these may include a lump sum or a line of credit.
Retirement Planning Concerns Addressed with Reverse Mortgages
• Cash Flow Management
For many homeowners, their equity can be a major portion of their net worth. For those who are house-rich but cash-poor, reverse mortgages can provide liquidity they might not otherwise have. This can be particularly beneficial for covering unexpected expenses or for supplementing retirement income.
• Taxable Income
Since reverse mortgages are loans, the proceeds are income tax-free, providing a source of cash that does not increase taxable income. Consult your tax advisor regarding possible tax benefits.
• Flexibility in Financial Planning
Reverse mortgages offer various payout options, including lump sums, monthly payments, or lines of credit. This flexibility allows financial advisors and their clients to tailor strategies that best fit their unique financial needs and goals.
• Long-Term Care Risks
As people age, the risk of incurring long-term care expenses increases and could create a significant financial burden for a household. A reverse mortgage could provide liquidity to help manage long-term care risks and ensure people can afford necessary care without depleting other assets.
• Existing Mortgage Payments
Reverse mortgage proceeds must be used to pay off existing home loans. (A requirement for a Home Equity Conversion Mortgage) This can eliminate monthly mortgage payments, freeing up income for other expenses or investments. The Borrower must live in the property as their primary residence, pay property taxes and homeowner’s insurance, maintain the home, and comply with the loan terms.
• Home Modifications and Repairs
For many, aging-in-place is a key priority, yet it may require home modifications to help solve safety and mobility concerns. This could include anything from installing ramps to updating bathrooms and kitchens. Whatever the need, using a reverse mortgage to access home equity can provide the funds necessary for these modifications.
• Estate Planning
Borrowers can use reverse mortgage funds for legacy activities without liquidating other assets and without impacting their current lifestyle. They could use the funds for charitable giving, setting up trusts, or funding education for grandchildren. Home equity can be a strategic way to create generational wealth while the borrower is still alive.
• Market Volatility
Investment withdrawals during a down market could impact portfolio longevity if taken early in retirement. A reverse mortgage line of credit could offset market volatility by providing an alternative source of funds until the market and retirement account(s) rebound
• Relocation
Reverse mortgages may be used to purchase a primary residence. The reverse for purchase option can help finance relocation to a more affordable area or “rightsizing” to a home better suited for mobility, accessibility, and functional needs. This may be an opportunity to preserve cash or investments that would have been used to purchase the new property. It may also offer the opportunity to responsibly upgrade to a more expensive property.
• Gray Divorce
Gray divorce is a term loosely used for people over 50 who separate and live in different households after multiple years or decades of marriage. If one spouse wants to retain the family home, they may use a reverse mortgage to buy out the other party. If both parties choose to sell the family home, proceeds can be split and used with a reverse for purchase to secure two new homes.
Wrap Up
In conclusion, loan professionals who specialize in reverse mortgage products can be a trusted resource for their financial advisor network. You can help them understand and implement reverse mortgage products so they can enhance their service offerings and provide more holistic financial planning solutions for their clients.
The views expressed in this article are those of the author alone and do not necessarily reflect the views and opinions of his employer. This article does not provide tax or financial planning advice. Please consult the applicable professional for such advice.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
