“The Urban Institute found that for 65 to 74 year olds, the percentage that held a traditional mortgage rose from less than 30 percent in 1989 to more than 40 percent in 2019…Median mortgage balances were just under $100,000.”
When homeowners reach roughly age 55, frequently with remaining mortgage or credit card debt, they can consider buying housing—or evading mortgage payments and spending equity from their house through reverse mortgages.
They are likely to get at least a third of the value of appreciated houses in cash paid lump sum or serially over time. This cash or income could save SLV homes for cash poor seniors or pay for in-house senior care. Equity simultaneously drips away with interest while increasing with home values.
Closing costs for reverse mortgages include title fees, appraisals, loan origination fees for processing and underwriting loans capped at 2% of the first $200,000 of home value and 1% of additional value, Most reverse mortgages are Home Equity Conversion Mortgages (HECMs) regulated and insured by HUD and FHA.
This cost is reasonable because the lenders may not get principal back if the loan balance exceeds home value. Borrowers must still maintain the house properly and pay for insurance and property taxes. But lenders can’t take away homes simply for the long healthy lives of residents.
Recipients pay no cash interest, so the IRS exacts no tax on distributions but also allows no mortgage interest tax deductions. Mortgage insurance and fees increase closing costs while equity in homes dwindles and dwindles faster if interest rates are higher.
Cash from these mortgages may lower need-based government funding for student loans or Medi-Cal. The loan comes due if homeowners depart, so these loans are not for vagabonds, nursing home residents or landlords. Worse: Reverse mortgage holders who fail to preserve investments may leave little or nothing in their estates for children or charities.
Mortgage brokers, at worst, are mere order takers for reverse mortgages tempting buyers solely with the immense cash flow advantages of ending payments. To lessen elder abuse, these loans require Mortgage Counselors and three-day rights of recission (cancellation).
Certainly, reverse mortgages can fund permanent life insurance to preserve equity in estates, but these agents charge high fees for confusing contracts that hide poor investment performance. Beware of annuity sales along with reverse mortgages as annuity costs are like keeping change in pockets with holes. One should not borrow from a house to get investments that may pay less than mortgages outstanding.
Reverse mortgages should ideally be considered with a Certified Financial Planner as part of a comprehensive financial plan involving fundamental choices about family, charity, money for health care/caregivers, and the financial legacy lost with your home’s equity.
This is a serious step, but it is the right step for many. At an advanced age, it is risky to take out a reverse mortgage for stock speculation. Yet many CFP’s are warming to strategic reverse mortgages because mortgagors can avoid depleting retirement plans, securities or real estate rental portfolios. HECMs can finance delayed Social Security withdrawals and Roth conversions.
The CFP Board website states: “The reverse mortgage option should be viewed as a method for responsible retirees to create liquidity for an otherwise illiquid asset, which in turn can create new options that potentially support a more efficient retirement income strategy (more spending and/or a greater legacy).”
Everyone appreciates secure housing with low payments and cash in old age and the reverse mortgage aids taxpayers with serious cash flow problems. Securely housed investors see that the HECM cash reserve or payments stabilize income to reduce the risk of portfolio depletion because funds are withdrawn when markets decline. Clients can take more market risk in stock investments that, on average, pay more long run because they aren’t so scared of running out.
Yes, this is leveraging realty to maintain stocks!
These items all increase the efficiency of investing and the amount of investable funds. If mortgagors borrow at 7% and retain market or rental investments that historically outperformed 7%, they may end up with better retirement funding with more liquidity while simultaneously increasing their total estate by more than what is lost to the lender. Reverse mortgages may help retirement strategies, because it may be the case, that “You can have your cake and eat it!”
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. This Mortgage Loan Originator (NMLS #2565162) serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
