When Last Resort Reverse Mortgages Are the ‘Best Resort’

The idea that reverse mortgages should be used only as a last resort once all other options have been exhausted is becoming an antiquated perception. But there are some situations where using a reverse mortgage as a last resort can be the “best resort,” says one financial planner in a recent blog post.

Research published in recent years, such as those from Barry Sacks and Stephen Sacks as well as Wade Pfau, have demonstrated that by reversing the conventional wisdom on reverse mortgages, that is, using home equity early in retirement as opposed to a last resort, retirees can actually increase the spending horizon of their invested retirement portfolios.

But while researchers maintain that the early use of a reverse mortgage can provide the best strategy to supplementing a retirement income plan, there are also certain scenarios in which spending home equity as a last resort would be advantageous, writes Dirk Cotton, a fee-only financial planner, in his blog The Retirement Cafe.


One such scenario, Cotton suggests, involves avoiding risk to home ownership when it may never become necessary. This could be particularly true for retirees who wish to leave their homes to heirs, but realize they might not be able to pay for retirement without using home equity.

“By spending home equity as a last resort instead of committing it early in retirement, the latter group might find that they never need to risk their home or that they can at least minimize the amount of equity they do need to spend,” he writes. “Think of it as matching home equity to contingent late-retirement liabilities.”

It’s also important for retirees to control their balance sheet leverage, since any balance sheet that includes debt is leveraged.

“Retirees who spend home equity as a last resort after depleting their portfolio will not simultaneously hold reverse mortgage debt and an investment portfolio—they will hold them sequentially,” Cotton writes. “That doesn’t mean they won’t have leverage from other debts, or that the amount of leverage created by the reverse mortgage will be imprudent. That depends on the rest of the balance sheet. But, it does provide an opportunity to manage that leverage.”

Read more at The Retirement Cafe here.

Written by Jason Oliva

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  • The loan of last resort is and should remain available to all those who are risk adverse. While we may speak in terms of 90% to 95% confidence, not all are as accepting of the underlying but unnamed premises upon which the research so heavily depends.

    • Criticism from an anonymously named cynic is weak. Adding additional assets (Home Equity) to the asset dissipation period means there are more assets to use. So they last longer. Period.

      The federally guaranteed credit line growth makes them last even longer. Period.

      Further use of intelligent application of said features under ANY assumptions still results in betterment of a retiree’ s liquidity. Period.

      Perhaps being cynical is easier and more fun than understanding facts. Understanding facts requires taking the time to learn something that might be different than what a cynic wishes to say.

      Everyone is entitled to their opinion. But having an opinion doesn’t make it a fact. (Credit to “Denial”.)

      • Craig,

        What makes you certain that home equity cannot have a negative balance? By definition, home equity reflects not only the value of an asset, but also of a liability. It is the difference between the value of the home and the balance due on all liabilities for which the home serves as collateral. Reviewing basic real estate finance could help in this regard.

        Federally guaranteed credit lines are only available to borrowers with adjustable rate HECMs; all other reverse mortgages being offered today, including fixed rate HECMs, do not. But why can’t a line of credit have a zero balance at closing? So how will a zero balance HECM line of credit always make assets last longer? Perhaps you are not familiar with a diminishing HECM line of credit due to a low balance in the line of credit with an amortizing service fee set aside; again that might be a little advanced but your mentors should be able to help with that; they have a tendency to make lines of credit last for a shorter period of time.

        As to decreasing liquidity with a reverse mortgage, how about going from a Cash Account, TIP, or other reverse mortgage with significantly higher proceeds available to the borrower to a HECM to cut the interest rate? You might want to talk with your mentors at work about how the different kinds of reverse mortgages still active today and how they work.

        Assumptions and facts are very different as opinions and facts can be. A basic course in philosophy in logic might be able to help out.

        Understanding what assumptions are and how they work could be a real boast to your career in business.

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