Many people think that a reverse mortgage is a program for those running out of options, or those that did not sufficiently plan for retirement. This idea is false, as the program is a great tool for those that take the time to learn how to use it. A recent article, “standby” by researchers Shaun Pfeiffer, C. Angus Schaal and John Salter has been published in the journal of financial planning covering the question, should a reverse mortgage line of credit be taken early or as a loan of last resort? Salter is a Texas Tech University professor and CFP; Pfeiffer, is an associate professor of finance and personal financial planning at the Edinboro University of Pennsylvania.
A reverse mortgage allows homeowners 62 and older to get a Line of Credit that is insured by the FHA to never be taken away, even if home values were to drop. For example, a homeowner 62 years old could get a line of credit of $200,000. Any money left in this account currently grows every year by 4.453% (assuming rates do not lower). For those that will live on their 401k returns during retirement, a reverse mortgage line of credit would allow them to use their reverse mortgage moneys to live on during dips in the stock market performance instead of depleting their principal invested. This allows their portfolios to rebound faster after a dip in the market because their amount invested will not decrease.
According to this study it allows for greater returns during market growth and prolonging and improving their retirement portfolio. “The results show an estimated 30-year survival advantage for early establishment,” “This holds true under various future interest rate and home appreciation scenarios for real withdrawal rates between 4 percent and 6 percent.” The study does say that this finding works if the borrowers are likely to stay in the home for 15 years or longer. To see what you qualify for click on our reverse mortgage calculator here.