Reverse mortgages have emerged to be an “out of the box” solution to the record financial market declines and consequential loss to retirement savings.
At the time of this writing, April 14, 2020, the COVID-19 pandemic is presumably approaching its apex. Clearly, no one knows if or when this will occur, or when life, as we have known it, will return to some semblance of normality.
One thing is certain though, that the devastating shock to the world’s economy and individual finances is unprecedented in history and unpredictable in recovery. All of this leaves financial advisors and their clients scrambling to find answers and solutions to the problems created by the COVID-19 financial turmoil, especially for those in or near retirement.
Confronted with inadequate or diminished retirement savings, the top concern among aging Americans is running out of money in retirement. For them, it simply boils down to cash flow and liquidity – having enough income to maintain their lifestyle, and adequate savings to afford anticipated and unforeseen financial needs. For some, assistance may be available by way of their home through a reverse mortgage.
Reverse Mortgage – An Innovative Solution to Stabilize Financial Security
The HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage is the national standard accounting for over 95 percent of all reverse mortgages. Although the HECM program has been revised and substantially improved in recent years with additional benefits and consumer safeguards, it remains a relatively unknown resource to the majority of financial advisors and older homeowners.
The HECM reverse mortgage is a unique resource for eligible homeowners (62 and older) enabling them to convert a portion of their home equity to tax-free cash without selling the home or taking on unwanted mortgage payments. Properly utilized, the HECM reverse mortgage can improve cash flow and increase liquidity for those who take the time to learn more and determine if it’s a good fit for their situation.
Reverse mortgage loan amounts are determined by: (1) current home value; (2) youngest owner’s age – 62 or older; and (3) current interest rates and program pricing. Higher valued homes and older owners are entitled to larger loan amounts. Currently, the maximum home value considered for the HECM program is $726,525. New proprietary (jumbo) programs are designed to serve higher values up to $4,000,000.
Massachusetts – Jumbo Reverse Mortgages Now Available
The Massachusetts Division of Banks recently approved new proprietary (jumbo) reverse mortgage loans for higher property values providing loan amounts up to $1,500,000. These programs not only provide larger loan amounts, they feature benefits substantially similar to the federally insured HECM, but at lower costs and don’t require onerous HUD/FHA approval for condominiums.
Strategic Considerations
The unique provisions of reverse mortgages, and how they may be used, are too numerous for discussion here. However, two of the most common considerations include:
Sequence of Return Risk. In down markets, such as exist now, requires the sale of larger amounts of investments to generate the needed cash. Retirement experts recommend a better solution is to coordinate withdrawals from investment accounts with tax-free withdrawals from a reverse mortgage line of credit. This preserves the value of investment savings in down markets. Numerous studies confirm that a coordinated strategy can significantly increase and extend retirement security.
Eliminate Mortgage Payments. The burden of making mortgage payments from fixed retirement income is a problem that might be eliminated. A reverse mortgage pays off all existing mortgages and liens, and does not require future payments be made.
Example: An 80-year-old owner of a home valued at $1,200,000 with a mortgage balance of $350,000 requiring $2,587 monthly principal and interest payments. The jumbo reverse mortgage paid off the $350,000 balance and provided the borrower and additional $316,000 of cash for future needs – without the obligation to make any future payments. Bottom line, monthly cash flow improved by $2,587 and savings increased by $316,000.
End Notes
- While reverse mortgage provide unique benefits to many homeowners, they are not suitable for all. Thorough understanding of the provisions, costs, responsibilities and long- term effects are essential to determine if one would be a good fit for each individual situation.
- Current financial market conditions are unstable and unpredictable. The availability of each program is determined by individual lenders and secondary market investors to continue funding capacity. Thus, program availability, terms, and pricing are subject to change at any time.
- The purpose of this article is to increase awareness and encourage investigation to learn if, or how, a reverse mortgage may be an appropriate consideration for individual situations and circumstances.
- For more complete information, visit the website of the National Reverse Mortgage Lenders Association (NRMLA) at reversemortgage.org, or feel free to call me with any questions.
George Downey (NMLS 10239) is the founder of Harbor Mortgage Solutions, Inc., Braintree, MA, a mortgage broker licensed in Massachusetts (MB 2846), Rhode Island (20041821LB), NMLS #2846. Questions and comments are welcome. Mr. Downey is a Certified Reverse Mortgage Professional (CRMP) and can be reached at (781) 843-5553, or email: GDowney@HarborMortgage.com
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