It’s true, Reverse Mortgages have received the scorned looks of homeowners and financial folks alike for years. But with changes made in how they are presented, funded and regulated, they are slowly making their way back into the good graces of financial advisors. In fact, several studies are now showing the use of reverse mortgages in a positive light to help with supplementing retirement income.
Although the cost of getting a reverse mortgage is higher than those associated with a conventional mortgage, all the income from a reverse mortgage is tax free. Income from other financial products will vary however in the taxes the homeowner will be hit will and some of them are significant. Additionally, the costs of guaranteed benefit insurance companies are usually higher than the costs as well. Bottom line, however, is the retirees ability to live within their retirement fund means, and not outlive them.
Studies are showing that the use of a reverse mortgage can aid in the longevity of retirement funds, in a number of ways. Both the American College of Financial Services and The Journal of Financial Planning are proving it with a few key methods. Of course, as with any financial predictions, they have to assume several things:
The same standard portfolio amount was used for each test
The same 4% annual spending rate was used
The spend rate was adjusted up in each scenario to account for inflation
The home was valued at a fixed amount and didn’t have a current mortgage payment
The borrower was aged 62
Because there are requirements in order to qualify for a reverse mortgage, the same principles were required in order for them to run the scenarios to test them against each other to compare them side by side. The test isn’t suggesting you would meet all the same assumptions, that’s why it is important to run a similar test with your exact financial situation to show you what you can expect in payments and returns. Your unique goals will change how the reverse mortgage options will or will not work for you.
A reverse mortgage specialist can work with your financial advisor to show you if it is a good option for you, which includes considering your objectives such as the length of time you want to be in your home, the age of yourself and your spouse and other qualifying factors.
Overall the findings showed that for people who needed to stretch their retirement funds 30 years or more, using home equity such as a reverse mortgage had the highest success rate- ranging from 70-90% success in having funds last.
Likewise, the lowest success rate was the one that ignored home equity as an income leveraging tool. The interesting and surprising thing was that it busted the myth that reverse mortgage killed the legacy left to heirs. In fact, those who used the reverse mortgage solutions showed a higher overall legacy value.
In debunking the taboo of thoughts around reverse mortgage, we also need to be realistic in the nostalgia we place on our homes. Many people think their children would want the family home, when, in the end, they end up bickering about proceeds, who gets it, and how the value is spent. We hang on to a house too large and more expensive than we need because of this nostalgia as well.
The other side of the taboo is when the funds from the reverse mortgage are used in ways that are not supportive of supplemental retirement income needs. Because the funds can be used anyway you want, that doesn’t mean they should be. It isn’t like winning the lottery- if you truly want them to last the time needed, sensible planning and spending is needed. Be open and honest with yourself and your financial advisor to determine if a reverse mortgage is a good fit for your situation.
I am a Reverse Mortgage Specialist who can help you determine if your unique situation can benefit from a reverse mortgage. Contact me today to discuss your goals and scenario, or to answer any questions you have about the process.
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