Financial Planning: The Downside of Using Home Equity for Retirement

Using a reverse mortgage to support retirement savings has garnered attention from more financial planners today than in years past, but not all advisers think home equity should be used for longevity planning.

That’s the opinion Daniel Kern and Renee Kwok, chief investment strategist and president, respectively, at TFC Financial Management in Boston.¬†Last week, Kern and Kwok wrote an article published in Financial Planning discussing why they don’t view home equity as a viable solution for their clients.

Acknowledging that downsizing is part of the retirement planning discussion, Kern and Kwok write that clients’ hope of relocating into a smaller residence is “to tap into home equity for retirement income while also accommodating for any future mobility limitation.”


“The real estate market in the Boston area has many clients realizing that downsizing is really upsizing in terms of cost,” they write. “Homes or facilities that have access to public transportation and ancillary services are often more expensive than the existing larger family home.”

Furthermore, Kern and Kwok write that unless clients are willing to move out of the region, it may be more difficult to unlock real estate equity values.

“As a result, we generally exclude home equity as a source of additional retirement income when planning for clients,” they write. “We primarily think of the home as a place to live in during retirement, rather than as a part of a client’s retirement nest egg.”

Read the Financial Planning article.

Written by Jason Oliva

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  • The following is two of the most significant statements in the linked article but not included in the post above: “There are also different ways to tap into home equity, including equity lines, sale-leaseback of homes to family members and reverse mortgages. Each alternative comes with advantages and disadvantages, in some cases with significant disadvantages.”

    So it is not as if the writers have not at least considered reverse mortgages but like many financial planners, they rule out reverse mortgages on their face. Some in this industry make financial advisors our great hope. If we are relying on them to massively turnaround our ever declining endorsement situation, then any real chance for growth is doomed.

    AAG is once again proving that we have a lot more to work on in the senior population itself than has been identified in the last 14 months by other industry participants. If their 80% growth in leads is any measure of the need to change our approach, what will show it? Soon AAG will identify the senior segment Tom Selleck most appeals to. They will hone down on what zip codes have the seniors Tom draws the reaction to call AGG and are most likely to originate HECMs with AAG.

    AAG is not one to sit back and accept the status quo. Will the rest of the industry simply sit back and rather than enduring the cost of research simply follow the latest uptick in lead production as most are doing right now? As we all must know by now, neither Realtors nor financial advisors will increase production in the way we need it right now. Both referral sources are slow and for now unreliable.

    • I completely agree! Every other article you read is about how FP’s have now changed their minds about reverse mortgages especially about opening a LOC to use as a hedge against a declining portfolio. Draw from your home equity rather than a depleted portfolio.
      It does make sense especially if you can keep closing costs down. I decided to spend several months educating myself and devoting much of my time marketing too and meeting with many FP’s. Most seem receptive when I meet with them. I have no idea whether it will produce anything in the future but as of today it has not paid off. I haven’t given up and continue to do follow ups but then I read how a TV advertisement with Tom Selleck is producing great results. I am led to believe that it is still a matter of trust with many seniors and this is where the time and money should be spent.

      • treverse,

        We not only agree but we also fundamentally agree!

        It seems AAG has struck a vein that is generally being overlooked because of the somewhat irrational overemphasis on financial advisors and Realtors.

        Your emphasis on trust and THIS is where we need to focus are right on point.

    • Financial Planners do not like reverses. Two reasons: 1) they do not understand them and 2) they do not make any commissions on the loans. If they thought about the RM seriously, they might realize that their investment base is not reduced when money is taken as a reverse and not from their investment portfolio.

      • Head Goon,

        When you speak about no reduced investment base impacted by the use of HECMs, you seem to addressing asset managers, whose fees are generally a percentage of the assets under management, not necessarily financial planners who may or may not have an asset management engagement with their client.

        Also many times it is not the financial planners who do not like reverse mortgages but rather their clients who do not want them for one reason or another. But it is also true that many financial planners are biased against them.

  • In my 9 years of originating HECM’s, almost every senior I talk to wants to remain in their home. What the writers may be missing is that the home equity is a substantial part of the wealth for many seniors. They can’t take their equity with them, so why shouldn’t those that want to maintain or improve their lives use home equity to do so. Some seniors tell me they want to save their home for their kids. The kids are not going to move into the house. As soon as the kids get the house sold, they will use the cash for whatever they want. I advise my clients if they want to leave their house to the kids, “why not take out a reverse and give the kids some cash while they are alive”? The kids don’t want the house…..they want the cash. The HECM line of credit is a great option that can be used to build up a reserve for long-term care. The unused line of credit balance will grow at 5-6% a year compounded and amazingly this is guaranteed by HUD no matter what happens to the value of the home.

      • There’s definitely a floor though, 3.25% on the 2% margin loans and 4.875% on the 3.625% margin loans. They are guaranteeing at least that growth rate.

      • Matt,

        Your statement is wrong no matter how you cut it. HUD guarantees a monthly growth rate on the principal limit that is one-twelfth of the sum of the note interest rate for the month and the ongoing MIP rate. What it seems you are proposing is that the index rate portion of the note interest rate for the month could be zero. Perhaps that could exist but where has that ever happened in modern history? But let’s pretend it could. Your pragmatic floor is still wrong both in a historical context as well as a practical one.

        You fail to recognize that not only do we have HECM borrowers who incur ongoing MIP at 1.25% but also those who incur it at 0.5% as well. Also your floor rate does not take into account that HUD can change that rate at any time on future HECMs under the authority of the Secretary of HUD found in 12 USC 1715z-20(h)(3).

        What both you and the Head Goon fail to state in a public forum is that only adjustable rate HECMs have a line of credit and that our discussion is confined to those products. Further, please show any document where HUD states it guarantees the growth rate in the line of credit. You will not find any such statement.

        The only place where the growth rate for the line of credit is guaranteed to a borrower is in the loan docs between lender and borrower and the second set between HUD and the borrower. However, the second set are not enforceable until they become the active loan docs through assignment or other qualifying event. Before that HUD simply guarantees a reimbursement if the lender complies with the model HECM loan documents provided by HUD and there is a loss on the note itself.

        Do not fall for the passive conclusion that MIP rates have not and will not change. All MIP rates have changed since the HECM program began in 1989.

      • You sure educated me Mr./Ms. Cynic. I’m not going to waste my time with a response. I would if you used a real name.

      • Matt,

        I have used a real name, George Orwellia on this website and like Ed McSherry stated he was Traveler, I have stated that The_Cynic was using the name of George Orwellia. However, the difference between what Ed is doing and I am doing is that George Orwellia isn’t my name.

        So call me George, Orwellia, or Mr. Orwellia if you wish. I find using a masculine name gets more direct and stronger responses. I use this name regularly on other websites.

        So respond or not. The choice has been yours, never mine. Putting conditions on your response is perfectly fine. This time I have fully complied with your condition. The ball is in your court as to whether you will respond.

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