Some financial advisors are now warming up to reverse mortgages, realizing that if used strategically, these products can be valuable retirement resources—even for homeowners who aren’t necessarily financially strapped, according to a recent article from CNBC.
“People are coming to retirement, and they don’t have much,” said Jamie Hopkins, associate professor of taxation at The American College Of Financial Services, in the article. “They have their home, Social Security and a little bit of savings. Why not use the home equity?”
Supplementing retirement with a reverse mortgage can be a boon to retirees who have a wealth of home equity, however, choosing the right method of funding is vital to a borrower’s success.
One method that some financial advisors don’t recommend is taking the lump sum payment, the article says, as advisors argue that there is more of a chance of blowing through all the cash and then getting into a difficult situation if a borrower takes all of the funds at one time. Some advisors, however, concede that a lump sum may make sense for some borrowers, depending on their situations.
Another strategy that homeowners could use is taking a line of credit, which is the option that gets most financial planning academics most excited about, because it can be a huge help for older adults who don’t necessarily need money right away.
“You can use it [line of credit] as added portfolio insurance,” said John Salter, associate professor of financial planning at Texas Tech University and a principal of the wealth management firm Evensky & Katz, in the article.
Salter, who co-authored a research paper that appeared in the Journal of Financial Planning, proposed that a reverse mortgage line of credit could also be used to protect against portfolio declines.
“If a nest egg suffers deep losses, as many did in 2008 and 2009, retirees can tap their line of credit for living expenses,” the article states.
Even though financial professionals are mostly warming up to the practical use of reverse mortgages, there are still some who are quick to point out the product’s shortcomings, like the higher origination feeds and FHA mortgage insurance.
Read the full article on CNBC.
Written by Alana Stramowski