Research Finds New Reverse Mortgage “Sweet Spot”

When an article was published last month in the Journal of Financial Planning that touted the use of reverse mortgages as an important retirement tool, many reverse mortgage professionals saw the value in speaking directly to the financial planning community—a population that has traditionally been reluctant to advise their clients on the use of reverse mortgages.

But another benefit of the research conducted by brothers Barry Sacks, a tax attorney and Stephen Sacks, an economist, is identifying a new “sweet spot” for reverse mortgage borrowers.

“I saw 401(k)s and IRAs as a way to accumulate wealth in retirement, but have also looked to home equity as a roughly parallel way of accumulating wealth. We saw the reverse mortgage not as income but as a wealth accumulation device.”

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Rather than the “conventional wisdom” around reverse mortgages, which means often using the reverse mortgage as a last-ditch effort to remain in a long-term home while eliminating payments on the home when cash flow is at its lowest, Sacks and Sacks advise using the reverse mortgage much sooner, and as an alternative to drawing down on investments that may be under-performing.

“The constant flow of cash removes what would have been volatile,” Barry Sacks told RMD of the strategy. “If you draw on stocks and bonds when they are down, you’re removing what would be there to recover.”

Reversing this conventional thinking about reverse mortgage products has revealed what Sacks calls a new “sweet spot” for borrowers. This borrower has accumulated wealth, perhaps in the range of $500,000 to $1.5 million in securities investments, and a home valued near the FHA HECM lending limit of $625,500.

The new thinking could help change the conversation with financial planners, which have had several hesitations about reverse mortgages, Sacks says.

“It’s bred into them this notion that they’re in the business of wealth accumulation and preservation. They tend to hit on the notion of the upfront fee, even though it doesn’t impact cash flow. They don’t like the idea of debt accumulating so early,” he says.

Sacks received some response to the article, he says, and has also obtained a patent for the formula that determines cash flow survival with the possibility of developing the patented concept and processing it into a product for use by mutual funds and other portfolio managers, and by financial planners.

A separate report by Texas Tech researchers is also expected to be published in a forthcoming edition of the Journal of Financial Planning.

Written by Elizabeth Ecker