Although they can often be a tough sell, reverse mortgages can likely help financial clients who find themselves running out of money in retirement. This is according to an article appearing in Financial Advisor by writer Dan Jamieson.
Home equity can be tapped for a number of reasons, including to pay off existing mortgages, mitigate sequence-of-return risks and bolster retirement plans that might otherwise be at risk of a shortfall in available funds, according to Dr. Wade Pfau, professor of retirement income at The American College of Financial Services and Chris Mayer, CEO of Longbridge Financial. Both men spoke on the topic of reverse mortgages at the Financial Planning Association (FPA) Retreat last week in La Jolla, Calif.
This doesn’t mean that the idea of selling a reverse mortgage to a skeptical buyer is an easy process, considering the negative coverage the product primarily gets in the mainstream press, “given shady practices used by some insurance agents to use reverse mortgages to raise money for other products,” Jamieson writes.
Leaving the possibility of getting a reverse mortgage entirely out of the conversation, though, has the potential for an advisor to, “[leave] clients fundamentally unable to achieve their goals,” Mayer said.
When speaking at the retreat, both men emphasized that retirees will most benefit by taking out a reverse mortgage early, rather than draining their assets first, with one reason for this being that “the credit line grows at the interest rate being charged,” writes Jamieson.
“This is the most confusing aspect” of reverse mortgages, Pfau said, since the growth in the line of credit is “divorced from the home value,” he explains.
Because the loan proceeds of a reverse mortgage are not taxed, this adds another potential use benefit in the form of “help[ing] advisors manage clients’ tax liabilities as they start tapping assets for retirement,” Jamieson writes.
During the event, one attending advisor made a comment about the difficulty in explaining reverse mortgages to clients who think there’s a big commission on the product. Mayer responded by telling the advisor that in the case of Longbridge, there is more to be gained from a long-term loan.
“The big money for us is where a client borrows money over time” rather than on an upfront commission, he said.
Because many financial advisors can’t quote reverse mortgage products without having a mortgage license themselves, he urged the advisors in attendance to refer their receptive clients to a mortgage broker who can actually make the loans, Jamieson writes.
Read the full article at Financial Advisor.