Reverse mortgage lenders provide homeowners an advance on their home equity and allow them to delay repayment until the home is sold. These planners said such products weren't for their clients, but for people who hadn't saved for retirement.
New protections have pushed many counselors and experts to rethink reverse mortgages. Many are investigating how to employ them in financial strategies. The Reverse Mortgage Stabilization Act of 2013 limits homeowners from withdrawing all their equity at once. About 40% of the entire loan amount is unavailable for a year following the original loan. New laws require homeowners to show they can pay property taxes and house insurance. Non-borrowing spouses have new protections.
Recent policy reforms “should make the product safer for seniors,” says Stephanie Moulton, an Ohio State University associate professor and co-author of a 2015 research on reverse mortgages. Prof. Moulton thinks that limiting borrowers' upfront equity withdrawals might slash reverse mortgage default rates in half. In 2014, 11% of reverse-mortgage borrowers in the federally insured Home Equity Conversion Mortgage program defaulted on property taxes or homeowners insurance.
Prof. Moulton says these reforms may allow larger banks to re-enter the market, boosting product credibility and cutting prices.
In a 2015 report, Wade Pfau, a professor at the American College of Financial Services in Bryn Mawr, Pa., recommended including reverse mortgages in a retirement-income plan given the correct circumstances.
Prof. Moulton acknowledges the concerns, but believes the government absorbs some of the borrower's risk through the HECM. HECM borrowers can't have negative equity, she says. Federal insurance covers any reverse mortgage balance that exceeds the home's value.
Financial experts advise these reverse-mortgage strategies:
Prof. Moulton says one of the most common reverse mortgage applications is to pay off an existing mortgage. Her research shows that more than 60% of reverse-mortgage borrowers do this. She says, “This may be sensible.”
Prof. Moulton cites a recent survey by Harvard University's Joint Center for Housing Studies that indicated approximately 40% of seniors age 65 and older carry a mortgage today. Reverse mortgages open up regular income flow, she explains. It's like receiving a monthly annuity payment for a household budget. One-time loans can go badly. Harold Evensky, chairman of Evensky & Katz/Foldes Financial in Lubbock, Texas, cautions against utilising a large sum as leverage to expand debt. “Circumstances may warrant the tactic, but it shouldn't be chosen without assessing the risk,” he argues. “The concern is overleveraging,” he warns.
Spending the equity in a property this way deprives the homeowner of a vital financial cushion, he argues, even if the homeowner spends the borrowed money without incurring more debt, such as on a vacation or a car.
Advisors recommend that homeowners create a line of credit through the HECM programme, whether they need the money immediately or not, because it can be utilised in numerous ways to protect savings or improve retirement income.
John Salter, an associate professor at Texas Tech University who has co-written papers with Mr. Evensky on reverse mortgages, believes a line of credit is better than a lump sum. Due to reverse-mortgage terms, an unused line of credit expands over time, providing the homeowner extra cash.
Shelley Giordano, chairperson of the Funding Longevity Task Force, a D.C.-based industry group that encourages using home equity for retirement income, proposes setting up a reverse-mortgage line of credit to shield retirement savings from market changes.IDEA: In a bad market, homeowners can borrow from their line of credit rather than their investments. In weak markets, withdrawals lock in losses and leave less money to grow. By borrowing, homeowners can recoup portfolio losses when markets flip.
Once the portfolio recovers, it can be used to pay off the line of credit, making it available for the next bear market. An HECM line of credit “cannot be terminated, frozen, or lowered,” says Ms. Giordano.
Ms. Giordano adds a HECM line of credit can be used as a source of income for persons who want to delay Social Security benefits to enhance their monthly payout. After applying for Social Security, you can stop using the credit line and repay the debt.
Because reverse mortgage income isn't taxed, a HECM line of credit can be used to prevent tax-bracket creep and increasing Medicare Part B and Part D payments. Ms. Giordano offers a reverse-mortgage line of credit for Roth IRA conversion taxes. In the conversion process, IRA distributions are taxed as ordinary income, and experts recommend paying those taxes using funds outside the IRA to avoid paying even more taxes.