Clients who risk running out of money in retirement can likely benefit from a reverse mortgage, especially if they take out the mortgage early in retirement, according to Christopher Mayer, chief executive at mortgage lender Longbridge Financial, and Wade Pfau, professor of retirement income at The American College.
Home equity can be tapped to pay off existing mortgages, mitigate sequence-of-return risks and shore up retirement plans that might otherwise be at risk of failure, Pfau and Mayer said Wednesday at the FPA Retreat in La Jolla, Calif.
But reverse mortgages can be a tough sell, given shady practices used by some insurance agents to use reverse mortgages to raise money for other products.
That may be why only 6 percent of seniors are interested in a reverse mortgage, even though 78 percent own a home.
“But by not talking about it, you’re leaving your clients fundamentally unable to achieve their goals,” Mayer said.
Reverse mortgages can tap 40 percent to 70 percent of a senior homeowner’s equity via a line of credit, a monthly payment similar to an annuity, a lump sum, or a combination of those options. Repayment is due when homeowners have been out of the home for a year, and they have no liability beyond the home value for repayment.
The most common use of loan proceeds is to pay off an existing mortgage. “You’re taking away that fixed [mortgage] payment and moving that to the end of retirement” when the reverse mortgage is paid off, Pfau said. That can help overcome a sequence-of-returns problem early in retirement, and significantly enhance the legacy value of the client’s estate.
In contrast to reverse mortgages, traditional home equity lines have mandatory repayment requirements, are fully amortized after 10 years (not ideal for an aging retiree), and can be cancelled by lenders just when a borrower might need cash to avoid draining a shrunken portfolio, Pfau and Mayer said.
They also stressed that retired clients will benefit by taking out a reverse mortgage early, rather than draining assets first. One reason is that the credit line grows at the interest rate being charged.
“This is the most confusing aspect” of reverse mortgages, Pfau said. The growing credit line is “divorced from the home value.”