CNBC: What Retirees Should Know About Fighting Inflation With Reverse Mortgages

Recent research conducted by Dr. Wade Pfau suggests that a retiree who chooses to incorporate a reverse mortgage into his or her retirement strategy can insulate a portfolio from market shocks, with a standby Home Equity Conversion Mortgage (HECM) line of credit that can benefit from economic inflation. This is according to a paper published by Dr. Pfau and coverage at CNBC.

Taking out a reverse mortgage loan can have potential benefits that some retirees may not have previously considered, and which some may find unexpected according to Pfau.

“The bigger impact is you’re reducing pressure on the portfolio in retirement,” he tells CNBC.

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For someone opening a reverse mortgage early while interest rates are low, they can potentially see additional loan proceeds. Additionally, higher levels of inflation could also lead to faster growth of the line of credit itself, Pfau tells the outlet.

“For anyone who’s thinking about a reverse mortgage, opening it before interest rates are higher, can be quite valuable if you’re in the home you’re thinking you’ll stay in,” Pfau tells CNBC.

One potential downside of a reverse mortgage for some retirees will be the associated upfront cost, the article says.

“Retirees pay 2% of the home’s appraised value for mortgage insurance premiums upfront, plus 0.5% of the outstanding balance every year for the life of the loan,” the article reads. “The origination fee is 2% of the first $200,000 of value and 1% for anything above that, up to $6,000. Third-party charges, such as the appraisal, title search, inspection and other fees, are typically 1% of the home’s value.”

In addition to properly managing the associated upfront costs, retirees who take out a reverse mortgage will need to have “a savvy spending strategy” to ensure that their resources are not exhausted before the end of life, Pfau advises.

“For some, it may be tempting to blow through newly tapped home equity, which may have a devastating impact on their retirement plan,” the article says based on Pfau’s input. “Still, reverse mortgages may be worth a look for retirees worried about their purchasing power.”

“There are more and more people who are looking at this strategically,” said Don Graves, president of the Housing Wealth Institute to CNBC. “The old adage was to wait until you run out of money and then do a reverse mortgage. That’s absolutely not the way it’s being used right now.”

Read the article at CNBC.

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