Homeowners may benefit from evaluating the options presented by a reverse mortgage — particularly a Home Equity Conversion Mortgage (HECM) sponsored by the Federal Housing Administration (FHA) — beginning at the eligible age of 62. While the product may not work for everyone, assessing the potential benefits of a reverse mortgage may be prudent and should not be dismissed out of hand.
This is according to Robert Klein, founder and president of Retirement Income Center in Newport Beach, Calif. in a new column at The Street.
“An evaluation should be done whenever contemplating refinancing, purchasing a new home, or planning for other major financial changes,” Klein writes. “Whatever the situation, a HECM can increase cash flow, reduce expenses, and increase retirement savings.”
He goes on to list five “metrics” someone can employ when evaluating whether or not a reverse mortgage might make sense for them in what he calls the “HECM Pentathlon,” which includes discerning projected mortgage balance; projected savings over the course of a retirement; projected overall net worth moving into later years; the projected HECM line of credit and the difference it could make in a cash flow situation; and the projected liquidity that a client may have access to.
Even with a small mortgage balance, a HECM may prove beneficial, Klein says.
“Most people entering retirement who own a home still have a mortgage, home equity loan, or outstanding HELOC balance,” he writes. “Many of these won’t be paid off for 10 to 20 years. Even if you have a minimal or no mortgage balance, you should consider a HECM if access to tax-free liquidity is or will be important to you during retirement.”
In terms of how projected savings interact with retirement, Klein points out that making regular forward mortgage payments will impact the savings position of anyone living on a fixed income. Employing a product that eliminates the need for monthly loan balance payments could prove beneficial.
“Likewise, when you don’t make payments on a HECM, which is what most people do, you have the opportunity to save money that would otherwise be used to make mortgage payments,” he says.
However, two of the key principles in the described “pentathlon” may be most critical when determining whether or not a reverse mortgage is an optimal choice: the projected line of credit and the projected liquidity, respectively.
“[These two metrics] when evaluated together, are the most compelling criterion favoring the use of a HECM as a retirement income planning tool for prolonging the longevity of retirement assets,” he says.
Read the article at The Street.