Reverse Mortgages Offer ‘Tremendous’ Opportunity for Financial Planning

Commonly perceived as scams or loans of last resort for the financially needy in the past, reverse mortgages have the potential to become popular tools to help Baby Boomers face one of their biggest challenges yet: retirement.

A number of factors have increased the appeal of reverse mortgages in financial planning today, including the various studies laboring on the points that many Americans have either not saved enough for their retirements, hold few assets, but maintain high stores of wealth tied-up in their homes.

Mix those ingredients with the desires of many Americans who want to age in place for as long as humanly possible and there is tremendous opportunity for reverse mortgages to fit into the retirement equation.

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“Reverse mortgages are becoming more popular, as Baby Boomers retire,” said Jamie Hopkins, associate of professor of taxation at The American College in Bryn Mawr, Pa., in a recent article with The Street. “In the next two to three years you will see a tremendous amount more. A lot of our wealth is built into home equity. This will be a saving grace for a lot of Baby Boomers.”

Hopkins has explored the importance of reverse mortgages in modern day retirement planning, and why retirees need to take a second look at these products that have often been the subject of negative press and misperception.

The policies that were the subject of that negative press have all been fixed, further strengthening the Home Equity Conversion Mortgage (HECM) product for borrowers, their non-borrowing spouses, as well as the Federal Housing Administration, which insures most of the reverse mortgages on the market today. 

“The takeaway: once scorned as predatory ripoffs, revamped reverse mortgages just may make sense for seniors whose homes are paid off (or close to it) and whose lives would be a lot more enjoyable with a steady stream of money going into their pockets from that house,” The Street writes.

While reverse mortgages are not for everyone, they now deserve a place in retirement financial planning, added Hopkins.

Read The Street article.

Written by Jason Oliva

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  • The professor is exactly right when he declares: “While reverse mortgages are not for everyone, they now deserve a place in retirement financial planning.”

    It is too bad the professor chose to make claims about the popularity of reverse mortgages. He provides no evidence supporting his statements and sadly this fiscal year is likely to be another bad year for endorsements. Reverse mortgages are not becoming more popular; they are trying to recover their former glory, i.e., in popularity and demand.

  • The article was interesting but you have to put credence on what my friend Jim Veal has said in his comment.

    However, the HECM of today is a better retirement tool in this environment than it used to be, especially since the FA ruling has come into effect!

    We do need to look ahead into the not to distant future. Jim Veal is right, 2015 has not proven that a reverse mortgage has been popular and most likely will be another year of bad endorsements.

    I feel the future holds much better prospects for the HECM. In my opinion, the FA ruling has done more good than anything. I feel our image in the eyes of our critics will improve tremendously.

    I also feel if we embrace the new changes positively and go after new opportunities, we will see 2016 turn around for the positive. We can use the HECM as a great retirement tool to show financial planers and other professional individuals such as attorney’s and accountants.

    Also, we need to capitalize on all the baby boomers becoming 62 years of age, which will continue for may years to come. We also must remember, there is more equity aggregately in the homes of seniors today than any other period in history. I realize I have said this many times before but it is so important for all of us to have this on our minds continually!

    John A. Smaldone

    This is the expressed opinion of John A. Smaldone only and does not represent an opinion of Willow Bend Mortgage or their affiliates.

    • Mr. Krangle,

      You are correct; however, no current reverse mortgage offered through commercial lenders requires any payments of principal or interest until the due and payable clause is triggered as part of termination. For some borrowers, higher interest rates actually make sense when it comes to cash flow especially with adjustable rate HECMs (reverse mortgages insured by FHA).

      Required cash outflow with a HECM (or for that matter any reverse mortgage) for homeowner’s and flood insurance, home maintenance, HOA assessments, and real estate taxes is no different than with other mortgages where there is no impound (or escrow) account. These cash outflows are critical in any home owning decision, not just reverse mortgages. HECMs may require (and offer) the set aside of funds for some lower income borrowers estimated to be sufficient to pay insurance and taxes during the estimated life of the borrower. Those proceeds are not added to the loan balance until actually disbursed to pay taxes and insurance.

      While fees are a real consideration, few of those costs are paid out-of-pocket. In most cases they are negotiable in determining available interest rates. Generally the longer the borrower is expected to hold the loan, the more sensitive the borrower is to higher interest rates but even then we find exceptions especially when using a Standby HECM Strategy.

      As an originator, I strongly believe in the cash flow opportunities HECMs bring into the retirement picture with immaterial disruption to the living situation of the borrower. Yes, with a HECM bunching the payment of several years of accrued interest into one tax year can be an effective tax plan when itemization might not otherwise be available or be very ineffective.

      HECMs also can mitigate credit dings for late payments or help those with erratic cash inflow make payments on time allowing balances to be paid off when cash inflow is better. There are numerous prudent applications of HECMs, one could go on and on. Perhaps the least helpful HECM is a fixed rate HECM since it affords no line of credit.

      Like all products, poor use of a HECM generally results in a poor experience. For insights on the most productive yet prudent strategies on the use of today’s HECMs, find a HECM originator who is experienced and competent in cash flow strategy matters. Most of the basic strategies you probably have known about for years yet there are unusual aspects of HECMs in particular that deserve a hearing out.

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