Reverse mortgages will likely have less appeal to financial planners following the implementation of program changes in October, writes Mark Miller in a column written for online publication Wealth Management.com.
The new rules “are aimed at making reverse mortgages safer, and encourage their use as a long-term financial-planning tool—rather than as a disaster-recovery tool,” Miller writes.
In reviewing the changes, including consolidated loan types, higher fees for mortgage insurance premiums, smaller loans, and more risk assessments, Miller notes the shift in use from a financial planning perspective.
“HECMs are best used as reserve backup funds, similar to a home equity line of credit,” he writes. “That’s what the saver HECM was good for—and with a mortgage insurance premium of 0.01 percent of a home’s appraised value, it was an inexpensive option. The new HECM that most closely resembles the older saver HECM doesn’t dramatically change the total loan amounts available.”
However, financial planners who have advocated for reverse mortgage use in an ongoing campaign to raise awareness of the benefits the loan type presents to retirees still maintain their position.
“A paper published last year by John Salter, Shaun Pfeiffer, and Harold Evensky made the case that an HECM credit line can extend portfolio life anywhere from 20 percent to 60 percent, depending on the scenario specifics,” Miller notes. “Pfeiffer said the authors re-ran their numbers for the old saver HECM product against the revamped HECM, and found that the changes didn’t much affect their findings.”
Yet the relative benefit of a reverse mortgage versus a home equity line of credit may be less realized for some borrowers, financial planner Michael Kitces told WealthManagement.com.
“…in many cases, you can get a HELOC with no fee at all,” Kitces said. “For someone who may not need the credit line anyway, if I have to pay all these upfront fees and costs, the HECM will not be very compelling.”
Written by Elizabeth Ecker