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Using Reverse Mortgages as a hedge against portfolio downturns

By Michael Pinter

Mortgage and Lending with First Meridian Mortgage

June 16, 2008 03:55 AM

Most Reverse Mortgage borrowers take one because they need the money. However, a growing number of Reverse Mortgage Borrowers don't need the money yet, but are afraid that they might need it soon.

We can all agree that the costs of living are increasing, not just for gas and food, but for many other essentials that are affected by rising fuel costs, too. What happens if you are living off a retirement portfolio and the stock market takes a tumble?

The ususal standard is that you should not withdraw more than 4% from your portfolio or you may run out of money before you die. If your portfolio gets hit hard, this may be difficult.

What some smart people have done is to take a Reverse Mortgage out to be used only in case of this situation. Obviously, there are closing costs that may make this strategy seem costly, BUT, if you can access your home equity during market downturns instead of using your portfolio assets when they are at their low points, this may be a great stategy that ends up makng you a lot more money in the long run.

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Cape Coral Florida Golf Course and Waterfront Homes

Gulf Coast Realty Network, Inc. - Cape Coral, FL

Your posting is very interesting. Here in SW Florida, most equity lines have been frozen at the actual loan balance, so maybe getting a reverse mortgage in place and working is a good move. I just wonder if the bank has any recourse if they decide it is not a good deal anymore?

Jun 16, 2008 04:05 AM

Kathy Brown

RE/MAX Alliance - Johnstown, CO

Sells Northern Colorado

I probably know enough about reverse mortgage to be dangerous; however, what I have observed about reverse is early seniors doing a reverse so they can have a new car, vacations, etc. and it doesn't feel right to me. Isn't there a strong chance that the instant gratification type of attitude will get our seniors into trouble later on, just as lines of credit have done for many homewoners already? I do think there is a place for reverse mortgage and it can be used as a tool in certain circumstances, but I feel like strong consideration is in order and there is a need for education to our seniors before doing a reverse. What am I missing?

Jun 16, 2008 04:10 AM

Danny Bruno

Century 21 Beachside - Rancho Cucamonga, CA

Taking money out of your home to invest in the stock market is just about the dumbest thing I have ever heard! Taking a reverse mortgage to live and improve your life style well that might be acceptable? Wall Street in general and most in the banking industry have gotten it wrong with their predictions about the housing crisis.

Why would anyone even consider doing a reverse mortgage especially if someone in the banking industry suggested it to them? Thousand of investors have lost billions of dollars investing in vehicles they thought to be safe and rated investment grade. The AAA rating on housing sub-prime would be a very good example of this. Their is always some new scam to separate honest people from the money!

If someone ask you about taking a reverse mortgage to invest in the stock market please, please tell them to keep their home free of debt and in their pocket the market will rebound sometime in the future!

Jun 16, 2008 04:31 AM

Anonymous

Danny,

I wish you would learn about the product so you would see that it is not a scam. I would never suggest that someone use the proceeds to invest in the stock market. What I am suggesting is to use the Reverse Mortgage proceeds instead of stock market assets when they are depressed.

Jun 16, 2008 06:41 AM

Kathy,

Thanks for the comment. Woudl you feel strange if the senior had $800,000 in their bank account and decided to use it to buy a new car, etc? The equity that a Reverse Mortgage unlocks is the same thing. They earned that equity over many years as their home appreciated in value. Why should they let it sit and do nothing when they can improve their lives now?

Jun 16, 2008 06:44 AM

Cape coral,

We have the same issue in new York with HELOC's getting frozen a lot. The lender cannot change their mind after a Reverse Mortgage is made, even if teh value of the property drops significantly. That is one of the risks that a lender takes (the borrower living much longer than expected is another.) The lender takes on no payment risk (because theer are no payments) but takes these other risks on on every loan.

Jun 16, 2008 06:47 AM

Using Reverse Mortgages as a hedge against portfolio downturns

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