can help your clients with estate planning, long-term care and their retirement plans.
Reverse Mortgages SIDAC will help you have a clear understanding of:
- Who should do a reverse mortgage.
- What are the true facts about reverse mortgages (there are a lot of myths and misinformation floating around).
- Where the reverse mortgage can be a benefit to your clients and/or their parents and families.
- When one should do a reverse mortgage.
- Why one should work with Reverse Mortgages SIDAC.
- How a reverse mortgage can help you help your clients with retirement planning.
Here are some ideas a reverse mortgage could be utilized as part of one’s retirement plan.
Protect other investments/Hedge against longevity risk – With the reverse mortgage in place and having cash available, borrowers’ can protect their other investments and retirement portfolios to hedge against longevity risk if those decrease or not have to draw on those, especially in a down market. They can still have cash flow yet save the investments for future use or use those funds for an inheritance.
Eliminate current mortgage payment – By using the reverse mortgage to pay off the current mortgage it allows one to improve their cash flow and have more flexibility for their retirement planning. (Borrowers are still responsible for paying property taxes and hazard insurance.)
Payment flexibility – Payments on the reverse mortgage are not required. However borrowers can choose to make payments in an amount they choose and when they choose. If they use the reverse mortgage to pay off their current mortgage and then continue making payments, the payment will reduce the loan balance and be applied to their line of credit. The funds in the line of credit will grow, meaning they will have funds in the future to re-borrow without refinancing and having to pay closing costs again.
Another big plus with the payment flexibility is if one can’t make a payment because they are no longer working or have a medical expense, they will have better cash flow management.
Funds for emergencies and/or long-term care – The HECM Adjustable Rate has a line of credit option with a growth rate. Taking out the reverse mortgage at an earlier age and leaving the line of credit to grow will provide more funds for emergencies and/or later when it’s likely they will need long-term care.
Purchase a new home – Rather than using cash, other retirement funds or a conventional mortgage, the HECM reverse mortgage for purchase (H4P) offers a stronger strategy. See page 19 for more details.
Proceeds are not taxable income – Because it is a loan, the reverse mortgage proceeds are not considered income and therefore not taxable. Therefore one can draw from the line of credit and not have the tax liability unlike some other retirement investments may have.
Continue working but have funds when not able to – Doing the reverse mortgage with a line of credit now could mean more funds available in the future. Borrowers can choose to continue working but when they can’t work anymore, or choose not to, they could have funds to replace their income.
While working they could choose to make payments on their reverse mortgage but then stop making payments when no longer working and take monthly draws or draws as needed to replace their work income.
Social Security claims – With the reverse mortgage in place the proceeds could replace the Social Security income when one spouse passes and they lost the 2nd Social Security income. They could set up receiving monthly payments so their cash flow continues allowing them to maintain their lifestyle.
One could use reverse mortgage proceeds to delay taking Social Security as part of their plan meaning they would increase their monthly Social Security benefits. The CFPB has cautioned about this strategy. Borrowers should consult with their financial advisors to determine if this would be a strategy for them and what is best for their situation.
Available funds even with lower home value – Because the funds are guaranteed to be available based on the home value at the time of closing (FHA insurance benefit), if home values decline (remember 2008?), the reverse mortgage borrower could still have access to more funds than the value of the home and the line of credit will continue to grow even if the home value declines.
Not depend on children – If one needs addition funds for maintaining lifestyle, medical expenses, long-term care, etc, the reverse mortgage could provide funds so they don’t have to rely on their children.
If children want to tap their financial portfolio to help care for their parents, a reverse mortgage on the parents home may be a better plan; providing funds for the parents needs and preserving the child’s portfolio for their own future.
Long-term Care Insurance – One may not qualify for long-term care insurance or afford the premiums so the reverse mortgage line of credit could act as an “insurance” to cover the long-care needs.
If one does qualify for long-term care insurance, the reverse mortgage line of credit could provide funds allowing a higher long-term care insurance deductible and a longer waiting period before drawing from the long-term care insurance.
Payoff spouse in a divorce – The reverse mortgage can be used to pay off a spouse going through a divorce, allowing one spouse to remain in the home.
Use in probate – In the case of the death of a parent, the reverse mortgage could be used to pay off a sibling or siblings so one can remain in the home or purchase the family home. This is beneficial when one child has been living in the home and taking care of the parent(s), and wants to remain in the home.
I am not a financial planner/advisor, accounting advisor/CPA or an attorney. This information is provided as ideas to use for one’s plan. One should consult with their financial, accounting and/or legal advisor on what works for their situation.
If you’d like to help your clients improve their retirement cash flow now or for the future, contact us if you are in Minnesota. As your local broker, we work with several lenders and provide free information and facts with no obligation, meeting with our clients in person whenever possible.
Hear resistance about suggesting a reverse mortgage? Here are some responses…
Watch this important message about “Constraints by Broker Dealers in Discussing Housing Wealth in Retirement Planning” by American College Studios: https://vimeo.com/265778957
“Just like recommending a will or trust, [you] can’t write anything that requires a law license. But [you] have no trepidation providing a referral to a lawyer.” Curtis Cloke, American College Studios.
“Providing resources and information is not prohibited.” “Even if you’re not comfortable talking about reverse mortgages, at least give them a direction.” Jamie Hopkins, associate professor of taxation at The American College in Bryn Mawr, Pa.
“An expanded fiduciary standard for financial advisers will put pressure on a variety of areas in the retirement income-planning profession” per Jamie Hopkins in InvestmentNews.
“In some circles, reverse mortgages and home equity have a bad reputation when it comes to retirement planning. But Jamie Hopkins of the American College says these can be critical engines for retirement income.” Watch here: http://alturl.com/x94d4
Articles and studies of using reverse mortgages for retirement and long-term care planning (also see “In the News” page for more articles):
- During NRMLA’s Reverse Mortgage Education Week, a conversation about wealth management and the role of reverse mortgages featuring renowned retirement expert and frequent Forbes.com contributor Jamie Hopkins. View webinar.
- Robert Powell writes in USA Today that a reverse mortgage could help with financial security, Want financial security? Home equity and retirement accounts are key.
- Jamie Hopkins, Co-Director of the American College’s New York Life Center for Retirement Income and an Associate Professor of Taxation at the American College, writes in his article in Forbes, Americans Don’t Even Know What Their Most Important Retirement Asset Is, Study Shows: It is really not a comprehensive plan if it ignores most Americans’ largest asset – home equity.
- Investment advisor,Terry Savage, shares her personal experience with reverse mortgages in the Chicago Tribune article, Reverse Mortgages: A personal look.
- In a short video in Investment news Wade Pfau and Jamie Hopkins of the American College of Financial Services offer some ideas about reverse mortgages and home equity, Reverse Mortgages: Are they right for your clients?
- Tom Davison provides insights on tax deductions in his article, Tax Deductions and Reverse Mortgages: April 2017 Update.
- Michael Kitces offers, The Taxation of Reverse Mortgage Loan Proceeds and Interest Payments.
- Wade Pfau shares, “Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed.” in Forbes, Using Reverse Mortgages in A Responsible Retirement Income Plan.
- The Wall Street Journal’s article, New Thinking About Reverse Mortgages, reviews how younger retirees may benefit from using reverse mortgage lines of credit as interest rates rise.
- Click here to read Journal of Financial Planning: HECM Reverse Mortgages: Now or Last Resort? A study to look at if maintaining a client’s real income needs is to require the use of home equity, then what factors should be considered, and how do these factors impact whether a reverse mortgage should be established now or as a last resort?
- Check out the study by Professors David W. Johnson, PH.D. and Zimira S. Simkins, PH.D. from the University of Wisconsin, Superior published in Journal of Financial Planning, “Retirement Trends, Current Monetary Trends and the Reverse Mortgage Market.“
- The Today Show gives options for funding long term care including a reverse mortgage: If you don’t have $250,000 to spare, how to pay for long-term medical bills
- The Minneapolis Star Tribune shares Reverse Mortgage Line of Credit Could Fund Long Term Care
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“It is really great not to have to be concerned about where the money will come from for my long-term care insurance policy payment and emergency repairs. It has relieved us of a great deal of stress and makes grocery shopping a lot easier too.” M.S.