Liquidity Found in Reverse Mortgages: Tampa Bay Times

October 29th, 2012 | by Jason Oliva Published in News, Retirement, Reverse Mortgage | 3 Comments

Despite AARP’s recommendation to make paying off housing debt prior to retirement a top goal, more Americans are retiring still burdened by mortgage debt—and a reverse mortgage might provide some liquidity, says the Times Union.

Carrying a mortgage into retirement only digs individuals deeper into years of accrued debt, suggests the article, citing insight from AARP and several financial planners.

The Times Union reports:

Paying off the mortgage before retirement has been the goal of generations of homeowners; some even celebrated with a mortgage-burning party. But an increasing number of households carry housing debt into their retirement years, according to the Federal Reserve’s Survey of Consumer Finances. Almost 1 in every 3 (roughly 29%) of retired households had housing debt in 2010. The median amount of retiree’s housing debt also tripled in that time, to about $61,000.

Even among the oldest households—headed by people age 75 and up—1 in every 5 had housing debt, up from 5.8 percent in 1989.

That means more households now head into retirement with high monthly payments, just at the time their incomes are sliding. AARP is not happy about the trend and recommends that homeowners try to pay off their mortgage before retirement.

“The more they can reduce their expenses when they’re not working, the better off they’ll be,” said AARP’s Jean Setzfand. “The mortgage payment is one thing that’s predictable, and a goal that people should work for, in terms of removing that expense from their ledger.”

Of course, retirees can always take out a reverse mortgage later against their home’s value, but those take time and often have large upfront fees.

Read the full Times Union article here

Written by Jason Oliva

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James_E_Veale_CPA_MBT

As individuals age, the proportional need for investments emphasizing increased asset value versus liquidity changes. Differences in economic and familial demographics means there is no single retirement plan which meets the needs of all.

Understanding the uses of reverse mortgages before reaching reverse mortgage age eligibility can mean not only access to the cash needed during retirement but also reduced worry over outliving cash inflow. Consumers who put off learning about its uses until conventional wisdom proclaims it is needed may mean its more beneficial aspects are no longer available.

Even if a Standby HECM allows borrowers to safely invest cash reserves at rates which result in $5,000 extra cash flow each year for 10 years, the additional cash compounded annually at even a 2.5% after tax earnings rate means $56,000 more cash available at the end of that ten year period.

Then there is the increase in the unused line of credit. Some have pointed to scenarios where the taking of a HECM early in retirement means a higher line of credit if home value stays about the same than if the consumer waited later in retirement to originate that same HECM. That argument is not without merit even if it is somewhat contorted and complex but if one can effectively use a Standby HECM the cost of refinancing to obtain a larger line of credit later could easily have been paid for many times over.

Of course these are but a few of the uses of reverse mortgages particularly in financial, mortgage, tax, estate, and cash flow planning.
REVGUYJIM

Those who forego a Standby HECM LOC early in retirement in hopes of later taking advantage of a hoped-for higher home value and the increased PLF from a higher age are taking multiple risks – higher interest rates and HECM program changes to name but two – that argue in favor of taking the ‘bird in hand’.
James_E_Veale_CPA_MBT

REVGUYJIM,

You are so right.

Waiting with the expectation that things will be the same or better later on is not all that reasonable. Interest, HUD, secondary market pricing, or even legislation changes could all work to the detriment of waiting prospects. Some changes come without warning!!!