Mortgage Professor on Reverse Mortgages: Look Beyond the Fixed Rate Option

Continuing in a reverse mortgage-focused series, The Mortgage Professor writes this week for Inman news about making the reverse mortgage dollar last. 

There are several ways a Home Equity Conversion Mortgage can enhance a retirement plan, the Mortgage Professor, a.k.a. Jack Guttentag writes: Supplement income with a tenure payment, use a line of credit to offset pension termination or to avoid running out of assets, or use a term payment to avoid depleting assets. 

“A major and potentially valuable feature of the Home Equity Conversion Mortgage (HECM) program is that it offers multiple options regarding how a senior can withdraw funds, as well as the flexibility to switch from one option to another as one’s circumstances change,” Guttentag writes. “This makes the HECM a potentially valuable component of a senior’s retirement plan.”

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The industry, he says, however, is focused on the all-cash option, which is “easier to explain, easier to sell and much more profitable.” 

Guttentag writes: 

“….Use a term annuity to avoid running out of assets

Seniors who enter retirement with a block of financial assets that they intend to use up during their remaining life face the challenge of deciding how much of these assets they can draw down each year without running out of money while they are still alive. HECM term annuities help deal with this challenge by allowing the senior to delay the process of asset depletion. Term annuities can be three or four times as large as a tenure annuity because the payments don’t last as long.

If the payment on a 10-year annuity is adequate to meet the senior’s needs, for example, the senior’s assets can be allowed to grow for another 10 years before asset depletion begins. This substantially reduces the danger of running out.

Use a credit line to avoid running out of assets

More affluent retirees who have assets sufficient to carry them well past their expected life span may nevertheless feel uncomfortable about the possibility, however small, that they could run out if their life span is exceptionally long. A HECM credit line is the perfect insurance policy against that contingency because it grows over time and it costs a tiny fraction of what a life insurance policy offering the same cash draw would cost. In most cases, the line won’t be used and the senior’s equity in the house would go to his estate, but meanwhile he has peace of mind.”

View the full article at Inman News or the Mortgage Professor’s website

Written by Elizabeth Ecker

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  • Dr. Guttentag may understand mortgages but he does not understand financial planning.  If one has invested heavily in Research in Motion, how in the world will a HECM term payout help recover the value of that stock?  What makes the research provided by the Sacks brothers and Dr. Salter/Mr. Evensky is that they have made a number of assumptions based on disclosed assumptions which Dr. Guttentag fails to do.

    Some very admired reverse mortgage entities also provided financial planning advice with no advice to the senior to seek the advice of a financial professional who can provide advice on underlying investments in their retirement portfolio including their IRAs and retirement plan asset investments; a number of those entities are no longer in the industry.

    • Invested heavily in RIM reminds me of having all your eggs in one basket which may not always be the best way to run a retirement portfolio. In order to close the gap between financial resources and longevity it is important to get financial advisors/planners involved whenever a reverse mortgage is considered. I found that affluent clients contemplating reverse mortgages are more inclined to heed this advice.

      • Reverse wisdom?  Perhaps.

        The real underlying issue is that HECMs alone will not allow an investment base to recover.  It takes much more.

        HECMs may provide a partial solution but without the advice of a proven, competent retirement asset advisor, chances are, leveraging through the use of HECM proceeds will only make matters worse.

        To read that “affluent clients contemplating reverse mortgages are more inclined to heed this advice” is to say that such advice is not being recommended in all such cases.  When it comes to the recovery of retirement assets whether they are inside or outside of a qualified retirement plan, the advice of a competent retirement asset advisor should be paramount even over getting a HECM.  Of course, that assumes the real issue is trying to help the senior not just originate another HECM.

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