Getting a Handle on Reverse Mortgages Getting a Handle on Reverse Mortgages
Elder Consumers Need New Forms of Financial Literacy Regarding Reverse Mortgages
by Jack Chandler

The savvy insurance agent who understands the overlooked values of reverse mortgages and helps clients understand the importance of this powerful financial tool stands ready to lead older Americans to a better lifestyle and a more rewarding retirement.

Let’s face it; most of us do not plan correctly for retirement. Many are at risk of having insufficient resources during retirement. Reasons for the gloomy forecast are a rapidly changing retirement landscape as defined by a rising Social Security retirement age and a sharp decline in traditional pensions coupled with modest 401(k) balances and longer life spans.

As any financial advisor can attest, we can be presented with some of the best retirement planning vehicles; such as annuities, life insurance, stocks, bonds, mutual funds, etc., but life’s peaks and valleys always seem to interrupt our good intentions. Then years go by and the reality of retirement is no longer a distant thought, but a loud knock at the door is demanding to be addressed. Usually, there is little or no sympathy for being unprepared. So, what’s a homeowner to do – play the lottery, living out our twilight years saying, “I shoulda, coulda, woulda, but didn’t because (insert excuse here)”? How can retirement issues be addressed correctly when retirement is just two to three years away or less? Retirement has its own cost-of-living index, increasing -regularly without regard to a fixed income. Being retired with a mortgage payment isn’t exactly what we consider and dream to be successful retirement planning, yet the majority of Americans may never see the day their mortgage payments end.

It’s time to accept the facts and see the golden-less years for the way they really are. The client failed to keep their financial promises and you, as the advisor, failed to keep them on the track for financial freedom, but that doesn’t justify giving up and searching for new clients. After all, you have worked hard building relationships with them. Who wants to throw all that effort away?
The client is still alive and, as their advisor, it is our duty to respond to their new predicament and to address their present and newly created future pitfalls.

According to the life cycle hypothesis of savings and consumption, one would predict that individuals would pay down their debts, build savings in their working years, and then divest those savings to support consumption in their older years.

But, when it comes to home equity, older homeowners have not followed this pattern.
However, aside from the wealth represented by Social Security benefits, the equity in the home (gross home value less mortgage) clearly dominates all other retirement resources. Now that the homeowner is in their retirement years, they fail to acknowledge that home equity is, in fact, a savings they built to support consumption in their older years.

One reason for this lack of interest has been the unattractive choices available for tapping into home equity. Before the advent of reverse mortgages, these choices were limited to obtaining a loan (if they could qualify) or selling the home. Selling their home means moving and most older homeowners do not want to leave their homes. The problems associated with getting a loan include foreclosure clauses with mandatory payment schedules. Of course, they could just remain in their home, house-rich and cash-poor. But they might have to do without the necessities of life, such as quality food, prescriptions, air conditioning, heat, and even visitation with friends and family, meanwhile deferring home maintenance.

But, to do without isn’t exactly living life to its fullest.
Reverse mortgages offer an attractive concept to tap into the home equity (a home-owner’s savings account) that they worked their entire life to obtain. The home equity is their reward for working and sacrificing all those years. To have equity sit idle while doing without in their twilight years, for the benefit of their beneficiaries, is just not the American dream nor was it ever the goal through their working years. This reward, if used wisely, can be used to improve the quality of life in ways too numerous to mention in this short article.

Reverse mortgages have been used to eliminate mandatory mortgage payments, thus increasing a retiree’s spendable income making life’s necessities obtainable. Also, the retiree may continue making payments, keeping the rising debt in check, and building even more of an available growing credit line.

Reverse mortgages have also been used to create a growing emergency fund that can be tapped into with no surrender charges, no penalties, no required minimum distributions, no tax reporting. They’re also accessible at any time in the future for whatever the retiree needs or wants. As advisors, it behooves us to become educated regarding the credit line within a reverse mortgage. The credit line growth, alone, could be used to make the payments on an LTC insurance, life insurance policy, or burial plan.

Reverse mortgages have been used to -lower the value on an estate for estate tax purposes while funding an ILIT for the personal maintenance and support of the retiree, their family and estate planning goals.

Reverse mortgages have been used as the ever growing cash cow to pay for home-related expenses, such as the gardener, the housekeeper, homeowner’s insurance, property taxes, etc., thus freeing up the monthly pensions for other needs or desires.

Reverse mortgages have been used to purchase vacation homes (for snowbirds), new cars, installation of driveways, dependable vehicles, and have even been used to help with the costs associated with grandchildren’s college expenses. Federally insured reverse mortgages, authorized by Congress in 1988, are known as Home Equity Conversion Mortgages (HECMs). The HECM is the only reverse mortgage insured by the federal government. Advisors and clients never have to worry about home market values remaining constant. FHA insurance covers any balances due the lender if the loan balance exceeds the value of the property. I’ve been involved with reverse mortgages since 1998 and have never experienced such a tool in all my more than 30+ years of experience in the senior market. In fact, I’ve even helped homeowners refinance their reverse mortgages with new ones thus tapping into even more of their equity.

Who is eligible for a HECM? Borrowers must be age 62 years old and use their personal residence. A homeowners’ credit score is not an issue nor is it even considered when determining eligibility. In some circum-stances, a manufactured home can also qualify for reverse mortgage financing, but the homeowner must own the lot as well. Foreclosures and completed bankruptcies do not disqualify you for reverse mortgage financing.
The home does not have to be free and clear. All or a portion of the proceeds can be used to payoff any present liens against the home. Even in cases in which the present debt exceeded the funds available from a reverse mortgage, we’ve helped the client tap into cash values of their life insurance or IRA; helped them move a second mortgage onto a credit card; or had adult children bring funds to the table so the reverse mortgage could be obtained. Again, this is where networking with experienced professionals is imperative to help the client understand the entire picture and all of their true options.

Certainly, homeowners and advisors alike should be thoroughly educated on reverse mortgages since they may offer new opportunities for older Americans. But they also call for new forms of financial literacy to help consumers manage their home as an asset wisely.

Whether the reverse mortgage is a niche product or a mainstream solution, only the future can tell. Networking with an experienced reverse mortgage professional is highly recommended if you expect to specialize in the senior market.

Using this powerful financial tool can be a very effective way to repair retirement planning that’s gone sour and help alleviate the concerns associated with life in the golden years.
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Jack Chandler is a national reverse mortgage loan officer. More information is available by contacting him via JChandler@HECM.net or call 800-540-6033.