A borrower exploring a reverse mortgage as an option to bolster retirement income may not always know where to start, but there are five key metrics that a prospective borrower should likely keep in mind before making a decision about whether or not to proceed with a reverse mortgage – specifically a Home Equity Conversion Mortgage (HECM) – to bolster cash flow in retirement.
This is according to a video presentation made by Robert Klein, founder and president of Retirement Income Center in Newport Beach, Calif. in a video appearance from TheStreet.
“In all cases with these five metrics, what you want to do is stack them up side by side with your existing mortgage assuming you have one,” he says. “Or even if you don’t, and you’re planning on adding a HECM, you can come up with an amount that you’d like to use to be comfortable with to draw on for a credit line from a HECM.”
The first metric is the projected mortgage balance. Since many seniors go into retirement with years or even decades remaining on their traditional mortgage’s balance, looking into a HECM and eliminating that forward mortgage payment is something that should be considered for anyone 62 or over, even if it’s not ultimately used, Klein says.
Metric number two revolves around projected savings, Klein explains.
“Whenever you’re making mortgage payments, you’re using money that could otherwise be used for other purposes,” he says. “So to the extent you have a HECM available that doesn’t have required payments, that frees up the money that you were previously using to pay a mortgage. You can use that for savings or for other purposes.”
Metric number three is projected net worth, specifically as it pertains to a HECM revere mortgage, he says.
“[This] is equal to your total mortgage balance, [and you] you always have to refer to that as a negative amount because it drains net worth,” he says. “[Add to that] projected savings plus your projected home value. That’s your projected net worth as it pertains to a HECM.”
The first three metric Klein lists are relatively straightforward, he says. The final two are a little less typical for some people, he explains.
“With metric number four where you’re looking at a projected line of credit, you might be familiar with a HELOC with a projected line of credit, [but that] works a little differently with a HECM,” he says. “One of the advantages of the HECM compared to the HELOC […] is the ongoing access to a tax-free line of credit and once again, it increases by the interest rate on the loan and any payments that you decide to make on the HECM.”
Lastly, the fifth metric is the projected liquidity that a client may have access to, he says.
Watch the video presentation via Klein’s YouTube channel.