In today’s financial landscape, retirement planning has become increasingly complex. It is crucial for financial advisors and homeowners to explore all available options to secure a comfortable retirement. One often-overlooked strategy is the use of reverse mortgages (RM). Recent data indicates a significant demographic shift with a large number of seniors turning 65. According to the U.S. Census Bureau, approximately 10,000 Americans turn 65 every day. These baby boomers hold a substantial amount of home equity, estimated at over $7 trillion. This equity is a mostly untapped source that could play a crucial role in ensuring a more secure retirement for many seniors.
A common type of RM is an FHA loan product offered through private lenders that allows qualified homeowners aged 62 or older to convert part of their home equity into monthly payouts (tenure payment), lump sum of cash at closing, a RM Line of Credit, or a combination of these options. The homeowner is still required to make their home insurance and property tax payments, live in the home as their primary residence and keep it in proper repair. Interest is accrued, calculated and will be paid back when the homeowner decides to sell or refinance the property or if the borrower defaults on the loan terms or the loan otherwise becomes due. Unlike traditional mortgages, where the borrower makes monthly mortgage payments to the lender, in a RM, the cash flows the other way, payments are made to the borrower. This can be a valuable financial tool for retirees who have substantial home equity and are looking to increase their cash flow.
Key potential benefits in a comprehensive retirement plan:
Supplemental Income in lieu of drawing from retirement accounts early: By tapping into home equity through a reverse mortgage, qualified retirees can access a source of tax-free (consult with your tax advisor) income to cover living expenses, travel, healthcare costs, or other financial needs (https://www.nrmlaonline.org/What-is-a-Reverse-Mortgage ).
Market Volatility Buffer: In times of stock market volatility or downturns, clients may be able to rely on the RM line of credit or tenure payment as a source of cash flow. This approach may help avoid selling financial investments at low prices, allowing money to remain invested for potential long-term growth and recovery.
Investment in Property: During market downturns, qualified clients may be able to use the line of credit to invest in property. With a cash offer, they may be able to secure properties at lower prices, potentially capitalizing on market recovery in the future (https://www.forbes.com/advisor/mortgages/reverse-mortgage-pros-and-cons/ ).
Accessory Dwelling Units (ADUs): Qualified clients may be able to invest the line of credit into building an ADU on their property. These units can generate rental income, increasing cash flow during retirement. If you use the money from a reverse mortgage to build this unit, there are no required monthly mortgage payments. If one has a large property, a manufactured home, or separate unit may be built using RM funds for potentially more cash flow.
Flexibility and Control: Reverse mortgages offer flexibility in how funds are received, whether as a lump sum, monthly payments, or a line of credit (https://www.consumerfinance.gov/consumer-tools/mortgages/reverse-mortgages/ ). This flexibility allows qualified retirees to tailor the strategy to their specific financial goals and needs.
Non-Recourse Loan: One of the often-overlooked advantages of reverse mortgages is that they are non-recourse loans. This means that borrowers (or their heirs) are not personally liable for any loan amount that exceeds the value of the home when it is sold to repay the loan (https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome ).
Growth Rate in Reverse Mortgage Line of Credit: One significant potential advantage of utilizing a reverse mortgage line of credit is the potential growth rate on the money available. Unlike traditional loans, where the line of credit does not increase over time, reverse mortgage lines of credit can grow. This growth is compounded annually and is the same as the interest rate charged on money borrowed.
Equity in a home is the most often overlooked asset in retirement. Including RMs into retirement planning may offer significant advantages for clients seeking stability and flexibility in their retirement years. By leveraging the growth potential of a reverse mortgage line of credit and strategically using the funds for investments or income generation, clients may be able to enhance their retirement outlook (https://www.investopedia.com/terms/r/reversemortgage.asp ). Financial advisors play a crucial role in educating clients about these opportunities and guiding them toward informed decisions that align with their financial goals. If you would like to look into accessing your home equity you may contact Robert Krepps rkrepps@hightechlending.com or toll-free at 877-567-7476.
Robert Krepps, NMLS #255191, at HighTechLending Inc. HighTechLending Inc, NMLS # 7147, is an Equal Housing Lender. Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act.
