Kiplinger: Reverse Mortgages an ‘Outside the Box’ Solution for Financial Stress

The economic volatility currently being caused by the COVID-19 coronavirus pandemic has made generating retirement income more difficult, which is why “outside the box” solutions should be on the table for American seniors. One such solution is a reverse mortgage, according to Charles Rawl, certified financial planner and principal at Charles W. Rawl and Associates, in a new column at Kiplinger.

“This is no time to be stuck in ‘conventional wisdom’ paradigms,” Rawl writes. “[T]ools that may have developed a bad reputation in the past, such as reverse mortgages, may deserve a second look. While their history of misuse is well documented, the industry has repositioned itself so that today’s reverse mortgages might be considered an important and sophisticated financial tool for some.”

Intelligently using a reverse mortgage line of credit – particularly the FHA-sponsored Home Equity Conversion Mortgage (HECM) – could help with extending either an individual’s or a couple’s financial health in ways that more typical strategies may not, Rawl writes. One of the best ways it can help accomplish this goal is through the avoidance of sequence of returns risk.

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“When the market experiences a downturn early in your retirement, when you’re no longer contributing to your retirement accounts and you’ve begun to take withdrawals, it can be tough to recover from a major loss,” Rawl writes. “An HECM line of credit can be used as a buffer to help protect against adverse portfolio returns, because retirees can carefully coordinate distributions from their portfolio and their HECM line of credit based on their needs and current market conditions.”

Using the HECM line of credit can also help a retiree pay for unexpected expenses that may crop up during periods of volatility, since preventing shortfalls in cash flow can be a major issue, he says.

“An HECM also can protect against the raiding of other retirement resources when those costs come up,” Rawl writes. “Another bonus: An HECM line of credit has a clear-cut advantage over the use of a traditional credit line in that it has a guaranteed growth option (the growth applies to unused funds) and a “non-recourse” feature. Unlike traditional home equity loans or lines of credit, an HECM line of credit can never be prematurely closed and collected.”

Contemplation of a HECM requires a potential borrower to know details of the associated costs, including mortgage insurance premiums, an origination fee and servicing fees. There are also associated third-party charges for things like appraisals and title checks, but in some cases these additional charges can be deducted from the loan’s proceeds which reduces the amount of cash available to the borrower, but also simplifies the process of paying associated fees.

Other risks to consider include the possibility of reducing inheritances for heirs, though this should be taken into account by everyone prior to the loan’s origination, Rawl writes.

“I’m always dumbfounded when grown children — who often helped set up their parents’ HECM in the first place — seem surprised when this happens,” he says. “When the borrower dies, the home is sold and the proceeds are used to repay the loan, so it’s important that you consider your legacy wishes when deciding if an HECM is right for you.”

Read the column at Kiplinger.

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  • It is a slow process to acceptance. To s o m e degree this is a step forward.

    Stopping acceptance at a solution outside the box hardly sounds like being recognized as a first tier solution to cash flow needs. Outside of the box is still astoundingly OUTSIDE of the box.

    Reading about reverse mortgages as a solution for something as esoteric to most seniors as the theory of reducing the risk of the sequence of returns (but of what) in an article titled “Reverse Mortgages an ‘Outside the Box’ Solution for Financial Stress” is hardly encouraging.

    As a CPA, I prefer a strategy that emphasizes, not just when money should be taken out of a HECM line of credit but one that also emphasizes when the HECM UPB should be paid down so that the maximum amount will be available to the borrower in the HECM Line of Credit in case of future bear markets such as the strategy described in the Standby Reverse Mortgage strategy developed by Evensky, Salter, and Pfeiffer.

    Why we do not read about the main use of reverse mortgage proceeds, paying off an existing mortgage? That is as much of an immediate cash flow solution for a substantial portion of season homeowners. It is simple to explain and has immediate results as to reducing cash outflow which increases cash inflow.

    Why most of those reaching out to the financial advisors to senior homeowners choose to spend so much time focused on an unproven but mathematically illustrated theory is hard to explain. To many of us who have known about reverse mortgages for years, adding the theory of reducing the risk of the sequence of returns is fairly straightforward but it is not so for those (yes, even many financial advisers) who have heard about reverse mortgages but lack knowledge about their essential characteristics.

    Anyone who promotes the idea that we are successfully reaching financial advisers just needs to see the direction of our HECM endorsement production since fiscal 2009.

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