Researchers Shaun Pfeiffer, C. Angus Schaal and John Salter have published a new report on reverse mortgages in the Journal of Financial planning, covering recent program changes and aiming to answer the question: should a reverse mortgage line of credit be taken now, or as a last resort?
Some of the research team has published previously in the same journal, citing findings that the use of a standby reverse mortgage strategy improves the chances of financial health among simulated retirement portfolios.
Now, Salter, Texas Tech University professor and CFP; Pfeiffer, associate professor of finance and personal financial planning at the Edinboro University of Pennsylvania; and Schaal, CFP and founder and managing director of Tandem Wealth Advisors in Phoenix, Arizona, have outlined the recent changes and have run new projections to find early establishment of the Home Equity Conversion Mortgage line of credit is still beneficial to retirement portfolio survival.
“The results show an estimated 30-year survival advantage for early establishment,” the report states in its conclusion comparing the early establishment of the loan versus prolonging it as a last resort. “This holds true under various future interest rate and home appreciation scenarios for real withdrawal rates between 4 percent and 6 percent. However, postponing the establishment of an HECM line of credit should be considered when the adviser and/or client has good reason to believe that home occupancy after loan origination is likely to last less than 15 years.”
There are major considerations, such as length of time expected to remain in the home, that should be included in such a conclusion, the research states. Those factors including duration of home occupancy, real withdrawal needs relative to home value, higher future interest rates, and lower future home price appreciation, can influence the outcome additionally.
“…the early establishment survival advantage in the current interest rate and lending environment is estimated to be greatest for those who expect (1) long duration of home occupancy, (2) higher real withdrawal needs relative to home value, (3) higher future interest rates, and (4) lower future home appreciation,” the researchers write.
Written by Elizabeth Ecker