For years, some people have thought of reverse mortgages as a loan of “last resort”, for those that did not properly prepare for retirement, or because of losses in the financial sector in 2008 needed extra help. As seasoned advisors learn more about the Federally Insured HECM product they are finding out it can be used for much more than that. A reverse mortgage is really the Swiss army knife of retiree loans. Here are just some of the uses they have found for a RM:
A source of Tax-Free money that is currently underutilized by the financial industry – A RM is a unique, federally insured, tax free (consult your tax advisor) instrument that most financial advisors overlook when preparing a comprehensive retirement plan. For example, a 75 year old retiree with a home worth $500,000 can access $300,000 with a RM. If you ever have a client worrying about not getting enough cash flow on their money, consider what they could get with an extra $300,000.
A hedge against possible lowering in home values- A RM Line of Credit allows a borrower to protect the equity that they qualify for in a LOC. There is no interest charged on the money left in a RM LOC. The amount of equity protected in that LOC also grows; currently equity protected here is growing by around 5% annually, you won’t find this kind of protection and growth in very many places. In fact, if rates rise and push home values down, the RM LOC growth rate increases by the same amount that the interest rate does. Meaning, if rates push down home values, you could end up getting 6%, 7%, 8% or higher growth rate on the equity protected in your RM LOC.
A fund to draw from in lieu of taking SS early – Each year a retiree can delay taking their Social Security payments, their check will be 8% higher. A RM guaranteed tenure payment or a RM LOC is a great way to supplement your income in the years from age 62 to 70 when you can delay taking your SS payouts.
A fund to draw from in lieu of withdrawing money from financial investments – Each time one draws from a 401k, an annuity, or other investment account, they are actually depleting the principal amount from which they draw interest, compounding and lowering their return on investments each time a payment is drawn. On a RM one can receive a guaranteed check for life, a guaranteed check for a period of time, a lump sum payment, or a RM LOC that can be used as needed to live on instead of stealing from one’s own investment returns.
A hedge against rising interest rates – A RM allows you to borrow money at today’s low fixed rates for the rest of your life, without having to pay it back until after one passes away. This money can be invested, or kept in a bank account but the rate will never rise, and your money can never be taken away, even if home values were to drop.
An easy way to downsize your home – Retirees can quickly realize that the large house they raised their kids in can be too much of a hassle to keep up in retirement. The constant cleaning, dusting, vacuuming, and yardwork can take up more of your time than you would like. If it is a 2 story home, one needs to consider moving to a one story home will be much easier for them in the long run. A HECM for purchase allows a borrower to purchase a home directly using a Reverse Mortgage.
Once a Financial Advisor realizes all of the options their clients have with a RM, they typically have two responses, First, this sounds too good to be true, and Second, why isn’t everyone doing this? To find out what a Reverse Mortgage can do for you Click HERE.