Today’s version of the saying “Strike while the iron’s hot” may apply to getting a reverse mortgage while interest rates are favorable, suggests
new academic research recently published in the
Journal of Financial Planning.
You’ve probably seen commercials and other advertisements touting reverse mortgages, but what you may not realize is that there’s also brand new research backing the use of reverse mortgages as a financial planning tool.
The Study
A group of financial planners and wealth advisors have just released a new report outlining the benefits of taking out a federally-insured home equity conversion mortgage (HECM) at a time when interest rates remain at historic lows, rather than waiting and risking the possibility of rates increasing or exhausting your retirement portfolio.
“Early establishment of an HECM line of credit in the current low interest rate environment is shown to consistently provide higher 30-year survival rates than those shown for the last resort strategies,” found researchers Shaun Pfeiffer, Ph.D.; C. Angus Schaal, CFP®; and John Salter, Ph.D., CFP®, AIFA®.
Reverse mortgages allow homeowners aged 62 and older to borrow against the value of their homes in the form of a non-recourse, federally-insured loan. In recent months, the HECM program has undergone several changes as the government seeks to make the loan a safer financial product for consumers.
These changes were considered in the financial experts’ latest report; some of the same researchers have previously explored using a “standby” reverse mortgage line of credit as a strategy to preserve and extend retirement portfolios.
For the new study, researchers projected several outcomes for a sample Calif. HECM line-of-credit borrower with a $500,000 nest egg and $250,000 in home equity at time of retirement. The nest egg comprised a portfolio split 60/40 between stock and bond investments along with a six-month cash reserve. The simulation used a 4-6% withdrawal rate of the credit line in 1% increments.
Using the simulated borrower, researchers looked at a few scenarios where a HECM line of credit was established during:
- A low interest rate environment at age 62 before the investment portfolio is exhausted
- Low interest rates once the investment portfolio is exhausted
- Moderate interest rates once the investment portfolio is exhausted
- High interest rates once the investment portfolio is exhausted
The Findings
The purpose of study was not to establish whether or not someone should take out a reverse mortgage, the researchers clarified in the report. Instead, they wanted to explore what factors to consider for a client whose income needs require the use of home equity, and how those factors impact the timing of taking out the loan.
“The empirical results from this analysis suggest early establishment of an HECM line of credit in the current interest rate and lending environment consistently provides greater survival rates than those strategies where the line of credit is established after the investment portfolio is exhausted,” write Salter, Schaal, and Pfeiffer.
However, it’s important to consider certain factors such as how long you plan to stay in your home, future home appreciation rates, how much of your loan proceeds you need to access each year, and where interest rates go, the report notes.
While each borrower’s situation is different, the research findings suggest that getting a reverse mortgage sooner rather than later may help you achieve a healthier, more sustainable retirement portfolio.
Have a question about a reverse mortgage for your retirement planning? Use our reverse mortgage calculator to estimate how much you could qualify for, or click here to learn more.
