TIME: When Using a Reverse Mortgage Makes Sense in Retirement

Various research in recent years have demonstrated the effective usage of reverse mortgages in retirement planning. But while using reverse mortgages as part of a retirement income planning strategy might not be a viable solution for everyone, it does make sense for some, says a recent article from TIME.

The Financial Assessment and other program changes over the last few years have fostered some of the most positive mainstream press reverse mortgages have ever seen. They have also stimulated greater attention from financial planners, several of which have published research detailing how reverse mortgages fit into a coordinated retirement strategy, while others have taken to mainstream financial publications like Forbes and The Wall Street Journal in efforts of raising awareness that today’s reverse mortgage is vastly different from the typical “loan of last resort” perception.

Now the latest in what has been a stream of positive press for the reverse mortgage industry, an article published this week in TIME’s Money section explores when a reverse mortgage is a good idea for retirement income.

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The article relies predominantly on the commentary of Howard Hook, a fee-only certified financial planner and CPA at EKS Associates in Princeton, N.J., who was called upon to assist with fielding a reader’s question regarding the prospect of obtaining a reverse mortgage to help fund retirement.

Larry Foutz, 54, from Chesapeake Bay, Md., wrote to TIME, saying he and his wife (also 54) would like to get a reverse mortgage when they are 62 to help fund their retirement. The couple does not have any children and there is no one to leave their home to upon their deaths. Next year the Foutz’s anticipate they will both be retired, and Mrs. Foutz has a pension.

In 2005, the Foutz’s bought a home for $712,000 and in 2010 the property was appraised for $600,000. While they do not currently have a mortgage on the home, they hope to get the value back into the $700,000 range now that prices are coming back. The Foutz;s then ask how much they would be eligible to receive from a reverse mortgage if their home is appraised between $600,000 and $700,000.

“In your situation, you should first figure out what your expenses will be once you and your wife retire,” says Hook in the TIME Money article.

This includes using retirement income projection tools and calculators, he added, to check whether Mrs. Foutz’s pension, investment income and eventually Social Security will be sufficient enough to cover fixed living costs.

“If you run short of money later on, you could take out a reverse mortgage then,” Hook said.

This strategy, however, runs counter to what financial planners’ reverse mortgage research has found; that by using home equity as a truly last resort once all other assets have been depleted, the spending success is significantly lower than if a reverse mortgage line of credit, for example, is taken at the onset of retirement—though the TIME article does not take note of these findings.

For retirees who do find they need the cash from their home equity, if for example their health care costs increase more than expected, or if they have a medical crisis, Hook suggests setting up a reverse mortgage line of credit that can be tapped as needed.

Read the TIME article.

Written by Jason Oliva

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  • Sadly, Mr. Hook typifies the vast majority of financial advisors with his advice.

    “If you run short of money later on, you could take out a reverse mortgage then,” says Hook.

    “The older you are, the more you can get, so it benefits you to wait.”

    The Time article provides no mechanism for responding to these statements for the benefit of its readership, which is unfortunate.

    • REVGUYJIM,

      You are very right. It is not that Mr. Hook is for or against HECMs but rather the danger of his ignorance of the impact of higher expected interest rates on the principal limit. Principal limits are not static as the expected interest rates rise.

  • The article is so filtered that it is all but impossible at times to tell what Mr. Hook, the advisor, is saying and what Ms. Rosata, the columnist, is saying.

    For example, the source of the following is not stated: “You can borrow roughly 50% to 70% of your home equity.” Home equity in this case is a number which is the difference between the value of the home and the current dollar amount of liens against it. It seems that there is no understanding that the PLR is multiplied by the maximum claim amount (MCA) to arrive at the gross amount of proceeds (or more correctly said “principal limit”) available. Here knowing the difference (if any) between the appraised value of the home and its MCA may be critical since the value of home is between $600,000 and $700,000.

    It seems Mr. Hook does not realize the line of credit grows when he says: “’If you run short of money later on, you could take out a reverse mortgage then….’” While other determinants of the HECM principal limit are mentioned, interest is not which may account to some degree to the immediately preceding quotation.

    There is much more wrong with the article but perhaps its most glaring problem is that the example is of someone with no heirs as if that should make a difference in the analysis. While not having heirs may make the sale easier, it does not change the analysis except when the heirs want to keep the home.

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