Reverse Mortgage Information: Why the Wealthy Should Use Reverse Mortgages

A reverse mortgage can be a valuable financial planning tool -- even for the wealthy.

A reverse mortgage can be a valuable financial planning tool — even for the wealthy.

Reverse mortgages have long been heralded as an option for people who are “house rich” and “cash poor.”

But today that tune is changing. Not only are reverse mortgages being recommended for people who have more home equity than they do savings, but also for those who, quite the opposite, have plenty of money invested for retirement.

The shift was explained in a recent New York Times article that talked about the growing need for reverse mortgages for people who are prepared for retirement and who are unprepared for retirement, alike.

Pointing to BNY Mellon’s recent announcement that it has entered the reverse mortgage business, the Times noted the impending change.

“[BNY Mellon’s reverse mortgage executive Michael] Gordon is quick to note that the product is not right for everyone,” the Times writes. “But he also thinks that many retirees with investment portfolios that are half in stocks and half in bonds are unaware of their true asset allocation. After all, their home equity is an asset too. Many people have an awful lot of it, and those who bought retirement homes in 2005 know all too well how much of it can disappear.”

The New Strategy

Rather than using a reverse mortgage after all other options have been exhausted, some financial planners today are instead advising that people who have other investments outside of their home equity take out a reverse mortgage to prevent from having to tap into their other assets.

Say you have an investment portfolio valued at $500,000, subject to market volatility like that of mid-October when markets dropped more than 5% on economic fears and global energy concerns.

When you’re relying on your investments in retirement, it’s particularly important not to sell at a loss.

Enter: the reverse mortgage. Instead of selling off your investments, you can take out a reverse mortgage line of credit against your home that you can draw down upon at your leisure.

The earlier you take out the reverse mortgage credit line, the more money you can access. That’s because under the government-insured Home Equity Conversion Mortgage program, the reverse mortgage line of credit, if left untouched, actually grows over time. So, the longer you have the line of credit, the more you can access.

Financial Planners Coming Around

One financial planner in particular has spearheaded a campaign for reverse mortgages among those who don’t “need” them.

Harold Evensky, who owns a financial planning firm and also teaches at Texas Tech University has authored several recent studies that have been published in the Journal of Financial Planning on the topic.

“At Harold Evensky’s financial planning firm, he and his partners have the types of clients that tend not to default on any of their debt. But they do worry a lot about people having to sell their investments when the markets have fallen, because that locks in losses,” The New York Times article notes.

Evensky told the Times of how he has changed his view in recent years.

“Mr. Evensky hadn’t given reverse mortgages much thought over the years or wondered how they could help stabilize client portfolios. ‘Like most practitioners, my attitude was that I thought they were terrible and that the costs were usurious,’ he said.”

But as rules changed and costs fell, Evensky and his colleagues revisited the way in which a reverse mortgage could help clients in their retirement planning.

Some of those colleagues, among three researchers including Shaun Pfeiffer, Angus Schaal, and John Salter published their findings in May 2014.

“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,” Pfeiffer, Schasl and Salter say. “The early establishment survival advantage for real withdrawal rates at or above 5 percent is estimated to begin between 15 and 20 years after loan origination and is shown to be as high as 31 percentage points, or 85 percent, greater than the last resort survival rates.”

Reverse Mortgages for the Wealthy

One common question that comes up among those seeking an alternative to drawing down on existing investments: why not just take a home equity line of credit?

But there are a few distinct advantages to the reverse mortgage line of credit.

  1. The reverse mortgage line of credit grows over time, providing access to a larger sum the longer the loan is in place, if the borrower leaves the line of credit untouched.
  2. Lenders can freeze a home equity line of credit at any time, and have been known to do so during economic downturns.
  3. Lenders typically consider income and assets when qualifying borrowers for home equity lines of credit and many retirees do not have the income to qualify.

Still, reverse mortgages are not a silver bullet, even for the wealthy, Evensky tells the Times.

“It’s strictly as a risk management tool, not as leverage or an investment vehicle,” he said. “It’s a way of allowing investors to have a long-term portfolio and not be forced to sell at the wrong times.”

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3 Responses to “Reverse Mortgage Information: Why the Wealthy Should Use Reverse Mortgages”

  1. 1 gahh

    Reverse Mortgages are nothing but legalized theft. What they don’t tell you is, they’re only giving you half of what your house is worth in cash. Then they sit back and watch that miserable small amount they gave you, grow into thousands and thousands in nothing but interest. In Ft. Worth Tx., a bank is trying to foreclose on a 100 year old woman who has a Reverse Mortgage, because she let her insurance lapse for awhile. The bank can’t wait to put her on the street, so they can sell her house and get their stolen money.

  2. 2 NewRetirementEditor

    Gahh is right about a couple things. Reverse Mortgages are loans so they do accrue interest and loan amounts will never equal the total value of your home — for good reason.

    Reverse mortgages (like forward mortgages) charge interest and since the borrower is not obligated to make mortgage payments during the term of the reverse mortgage loan –
    the lender uses the non-borrowed equity as collateral – which is why a
    borrower can’t borrow the full value of their home.

    If someone wants
    the full value of their home in cash, then they can sell their home and
    move to a smaller home or rent. The key difference between a reverse and forward
    mortgage is the reverse does not require mortgage payments, the borrower
    can stay in their home for as long as they live – even if the mortgage
    debt on their home exceeds the value of the home, the mortgage is
    non-recourse so your heirs can turn over the home.

    As far as the Texas woman getting foreclosed on. This was a definite problem. As you noted, she could not afford taxes and insurance on her home. She would be having the same foreclosure issues if she had a forward mortgage. That being said, new regulations are now in place for Reverse Mortgage borrowers to insure that they can continue to afford their home for the rest of the lives.

  3. 3 iknowimsmart

    best for people with no children and other assets
    so you don’t care wtf happens to your house after yo go into a home or die!!

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