Reverse Mortgages (RM) are most often used to eliminate monthly mortgage payments, although borrowers are required to continue to make their home insurance and property tax payments. Occasionally, a retiree may only want to lower their monthly mortgage payment to one that is more comfortable for them and they may be able to do this using a RM. Voluntary payments on a RM can help pay down part of the interest due on the loan.
Shelley Giordano is co-founder of the Academy for Home Equity in Financial Planning at the University of Illinois Urbana-Champaign and of enterprise integration at Mutual of Omaha Mortgage. She writes in a new column at The Street: “As (financial) advisors gain knowledge of reverse mortgages, they are inclined to recommend its use to clients whose financial profile is more likely to benefit from a deduction of accrued interest. This increased comfort with recommending a reverse mortgage is confirmed by an Academy survey of financial professionals which verified that greater education and experience levels correlate to the increased use of reverse mortgages.”
With a reverse mortgage interest is added onto the amount owed on the loan each month and compounds. This is why this loan is referred to as a Reverse Mortgage; a traditional mortgage you pay down the amount owed while paying interest and a RM reverses the equity payment back to you in the form of a monthly payout or Line of Credit or Lump sum with interest being charged for the total loan balance.
Shelley Giordano further indicates in The Street that “Retirement researcher Wade Pfau […] recommends that the homeowner make voluntary payments but suspend those payments in years that a draw on retirement funds would generate stress on the portfolio.” She also indicates that “Because there are no [monthly mortgage] payments dictated by the loan terms while the borrower resides in the home, the homeowner is free to decide when and if any payment accommodates his cash flow/portfolio preservation needs.”
Giordano also indicates that “There may be situations where the homeowner would allow the interest to accumulate for years, and later make a large payment to reduce the loan balance.. Simultaneously this would create a sizeable interest deduction. As [Michael] Kitces discusses, to be most efficient, there must be enough taxable income to absorb the deduction. Kitces mentions, as well, that to absorb the interest deduction, the client could elect to take a Roth conversion.”
When a borrower makes a payment on a RM that amount is added into the Line of Credit balance (on a HECM ARM) that grows and is compounded each year. Giordani explains “This revolving line is poised for funding future spending shocks, market turbulence, and/or increased longevity. Unlike a conventional home equity line of credit (HELOC), the lender is not permitted to cancel, freeze, or reduce the line. As the homeowner ages, his access to equity is guaranteed to grow at the rate interest is accumulating on what has been borrowed. This growth component of the [reverse mortgage] line of credit continues throughout the life of the loan regardless of the future value of the home.”
The RM has some unique advantages that HELOC’s or traditional loans do not have. With the housing market in increased uncertainty lately, it might be worth considering getting a RM LOC that cannot be reduced due to a decrease in home value. In the great recession of 2009 lenders froze and eliminated the funds available on many Equity Lines of Credit. For borrowers that were using these funds to live on and also to help make mortgage payments, this was catastrophic to their financial picture. If you would like to discuss the prospect of what a RM would do for you or your clientele, you may reach out to me, Robert Krepps, at rkrepps@hightechlending.com or toll-free at 877-567-7476.
Read the full article from The Street here.
Robert Krepps, NMLS #255191, at 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.
