Reverse mortgages have grown more appealing as a tool for older people who need money for retirement but want to stay in their houses as the stock market has become more volatile while the housing market is still booming.
According to information from the Department of Housing and Urban Development supplied by service provider Reverse Market Insight, the volume of home equity conversion mortgage loans increased by 26% in March. Although it decreased by 3.8% in April, the number of loans for the month still exceeded 6,000 and was higher than the recent average.
Refinancing Reverse Mortgage economics aren't as strong as they once were. To prevent potential losses to taxpayers, the Department of Housing and Urban Development, which oversees the HECM program, doubled the mortgage insurance premium on the loans in 2017 from 0.5% to 2%. As a result, reverse mortgage upfront costs increased by $1,500 for every $100,000 in mortgage face value.
However, the market environment for reverse mortgages is favourable.
Wade Pfau, PhD, a principal and advisor at Tysons, Virginia-based McLean Asset Management, said: “This is still a fantastic chance to think about a reverse mortgage. “Housing prices have increased significantly, and historically speaking, interest rates are still cheap.”
Reverse mortgages have gained considerable traction in the financial planning industry, where planners like Pfau suggest using them as a viable tool for managing retirement distributions.
Even though costs are higher currently, accessing your home equity as a potential source of finances makes sense if you're short on cash because it makes up roughly 66% of the average retired American's wealth.
According to Pfau, who has written a book about the loans, “research in the financial planning industry regularly reveals that reverse mortgages can improve retirement planning outcomes.” “It helps to have another source of funding outside of a portfolio of investments that might act as a safety net for people,”
Even if you don't require money right now, establishing up a line of credit through a reverse mortgage on favorable terms can give you access to sizeable funds in the future. Regardless of what happens to the home's value, the line of credit will keep expanding at the rate of the reverse mortgage's interest rate. So a reverse mortgage mitigates the risk of declining home values.
If you have a portfolio of investments, you may then choose whether to sell securities or use the credit line when you need money. That might sound a little bit like market timing, but Pfau offers a straightforward guideline to help make the choice.
Sell from the portfolio if your investments are worth more than they were when you retired, he said. If not, take a loan from the line of credit for reverse mortgages.
Not all financial consultants support reverse mortgages. Only two clients have been informed about the reverse mortgage option by certified financial planner Howard Hook, a senior wealth advisor with EKS Associates in Princeton, New Jersey, with one of those clients finally receiving a loan.
Reverse mortgages might be a good option for borrowers who don't want to sell their investments but need to pay for medical expenditures, a more expensive mortgage, or personal debt. The reverse mortgage still has a significant cost and risk when everything is considered.
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