The growth in a person’s home equity can potentially be factored into a retirement savings equation, and the employment of a reverse mortgage can help to convert that equity into spendable cash at an opportune time. This is just part of a broader potential retirement spending strategy offered by Jack Guttentag, aka the “Mortgage Professor,” in a new column published by Forbes.
“Consumers who have a significant portion of their wealth in their home should aim to supplement their periodic savings by increasing their home equity during the period before retirement,” Guttentag writes. “Unless the consumer wants to leave the home equity in her estate, that equity can be converted into a reverse mortgage credit line to supplement spendable funds during retirement […].”
While there are certain elements of a reverse mortgage that will remain outside of the borrower’s control — most especially market conditions that determine a home’s value — there is at least one way that a borrower can affect these attributes on their own, Guttentag says.
“While the home equity on which reverse mortgages are based is impacted by general market trends over which individual retirees have no control, owners have discretion over maintenance and improvements that affect the value of their own particular house,” he explains.
There is also some active participation required on the part of a reverse mortgage borrower if they decide to incorporate such a loan product into a retirement strategy, Guttentag says.
“The key to making the reverse mortgage an effective component of a retirement plan is to phase systematic draws on the credit line into the plan,” he explains. “Homeowners who draw the maximum amount available from their reverse mortgage at the first opportunity sabotage their retirement.”
Discipline regarding the most effective use of a reverse mortgage loan’s proceeds is often encouraged by financial experts. In a 2018 interview with RMD, Stanford Center on Longevity Consulting Research Scholar Steve Vernon described his own attitude toward reverse mortgages, and some of the ways in which certain borrowers have not prudently used their loan’s proceeds in his estimation.
“I’ve seen neighbors take out reverse mortgages, and then they take cruises, and the money’s gone,” he explained. “So, I just think there’s a lot of dangers in the reverse mortgage market for people who don’t have the discipline or the knowledge on how to use them, and I would hope that originators would explain those dangers.”
Read the Guttentag column at Forbes.