Tapping home equity is often an overlooked possible source of income for those with fixed resources, and considering the home equity that seniors have access to, reverse mortgage products should be considered when coming up with a retirement funding plan. This is according to Stephen Resch, VP of retirement strategies at Finance of America Reverse (FAR), in a new editorial at MarketWatch.
While reverse mortgages have a persistent reputation as being a loan of “last resort” for seniors who have no other options in times of financial stress, they can often serve as a component of a multifaceted retirement plan for retirees to consider and for financial advisers to explore, Resch writes.
“While individual needs and situations differ, one of the key drivers behind a reverse mortgage is to provide an annuity-type payment or to eliminate an existing mortgage payment — both of which increase household cash flow,” he says. “This additional cash flow can be used to pay for expenses, in-home care or other long-term needs, and to help keep retirement income at a level where assets are not depleted.”
Reverse mortgages are also a viable option for investors who seek to avoid sequence of returns risk, citing the work of retirement researcher Dr. Wade Pfau who has written on the topic in the past. Still, the idea that a reverse mortgage may have greater applicability to retirees’ situations does not mean that the loans are for everyone, Resch says, and several individual factors should be taken into account prior to making a final decision.
“One key consideration includes how long a potential borrower plans to remain in their home,” he says. “While many retirees plan on aging in place, 1-in-3 baby boomers say they intend to move at some point in retirement, and others may consider assisted living or renting rather than owning. For situations like these, shorter-term funding needs may be more effectively met with traditional financing, including Home Equity Lines of Credit (HELOCs), due to the costs of securing a reverse mortgage.”
For those seniors who are primarily looking to remain in their homes, however, a reverse mortgage’s viability notably increases, Resch says.
“The cost of insurance amortized over a 20- to 30-year period can be a reasonable value proposition when considering not only those benefits, but others, such as the opportunity to have a line of credit that grows and compounds over time, regardless of what happens to the value of the property,” he writes. “For example, that $10,000 insurance premium, spread over 25 years, equates to just $400 annually (before financing costs).”
Since the vast majority of the American baby boomer population is made up of homeowners, other combined factors like all-time highs in housing prices and home-equity levels can allow seniors to think about incorporating a reverse mortgage into retirement planning, he says.
Read Resch’s op-ed at MarketWatch.