Getting a Handle on Reverse Mortgages
Looking to Build a Forward-Thinking Retirement Plan for Baby Boomers? Think in Reverse
by Dan DeKeizer

A growing market has developed in the past few years featuring the use of reverse mortgages as a way to secure a bit of financial breathing room for many people approaching retirement or in retirement. Half of all federally insured reverse mortgages ever made have been originated in the past two years, according to statistics from the Dept. of Housing and Urban Development. With millions of Baby Boomers approaching retirement age, interest in the product is only expected to grow. However, many Americans are still unclear about how reverse mortgages work and when they are appropriate. This lack of understanding only underscores the need for professional help to guide people through their options.

A reverse mortgage is a type of loan that is only available to homeowners aged 62 and older. The loan is secured by a home (primary residence). It allows homeowners to tap into the equity built up in the property from years of paying off the principal and an increase in the home’s value that may have occurred over time. The loan can be taken as a lump sum, as regular payments for as long as the borrower lives in the home, as a line of credit, or any combination of these options.

There are several advantages to a reverse mortgage. Borrowers can live in the home as long as they want. When the property is sold, the borrower does not owe the bank more than the mortgage or the property’s sale value. Interest and charges accumulate, including origination and closing costs, with no monthly mortgage payment required. As with traditional mortgages, the bank does not own the client’s home. Borrowers retain ownership and are responsible for paying property taxes and homeowner’s insurance, as well as property repairs. Furthermore, the proceeds do not affect regular Social Security or Medicare benefits, although certain means-tested government benefits, such as Supplemental Social Security or Medicaid may be affected (Homeowners who are receiving these benefits need to understand the qualification rules for those programs before taking a reverse mortgage).

As a financial advisor, it’s important for you to realize that a reverse mortgage is not for everyone. For example, a reverse mortgage should not be considered if your client wants to leave their home or property debt free to heirs. It’s not likely to be attractive to retirees who want to move in a few years or those who will be living elsewhere, such as an assisted care facility for 12 months or more.

There are many other situations in which it does make sense to recommend a reverse mortgage. Historically, reverse mortgages have been an attractive option for those with limited sources of liquid income, whose primary asset is their home, and who want to “age in place” comfortably in retirement.
You may find that a client does not fit the profile. But, a reverse mortgage may be just right for the parents of that client. If your client is providing meaningful finan-cial support to their parents, a reverse mortgage could relieve your client of that monthly expense. It may also enable more effective retirement planning for the client and the parent.

Other types of retirees who are increasingly finding uses for a reverse mortgage. A reverse mortgage may be useful for those who are moving into retirement and still have a meaningful mortgage left to pay off. Using a reverse mortgage to refinance that existing mortgage and eliminate the monthly mortgage payment makes for an interesting option.

Many new retirees are considering a reverse mortgage to avoid taking Social Security too early or defer taxable withdrawals from IRA or 401(k) balances. They want to make the most of what they have in retirement and manage their decisions about when to start social security and when to draw on qualified savings.

As a financial advisor, it’s important for you to be able to help your client determine whether a reverse mortgage is the best solution. Here are some of the questions your client should consider before making a final decision:
• Do you qualify? Are you and any co-owner of the home at least 62 years old? Do you own your house, condo, or co-op, and live in it as your primary residence? These qualifications need to be met before a reverse mortgage can even be considered.
• Is there substantial equity built up in the home? For individuals and families who have diligently paid down mortgages for years, and have worked hard to maintain and improve their property, a reverse mortgage is a way to realize a portion of that financial value. Also, if the home value has appreciated over the years, the available equity may be more than they think, despite current market conditions.
• Are you satisfied with your current or anticipated retirement income? Many people find that traditional retirement tools, such as IRAs, pensions, and 401(k)s, do not provide enough income to fund current or anticipated living and healthcare expenses comfortably. A reverse mortgage can provide more peace of mind and improve the quality of life. Your client can boost cash flow each month by taking reverse mortgage proceeds in regular monthly payments (the “tenure” option) that last as long as they live in the property. Also, when the time comes to pay off the loan, it usually produces a lower loan balance than a lump sum distribution.
• Do you want to retire your existing mortgage? Since many retirees are still paying a conventional mortgage, they have less disposable income than they want at the end of the month. Depending on the amount, a reverse mortgage can pay off an existing mortgage, freeing up money for other things. However, the reverse mortgage may not be enough if the existing mortgage accounts for a high percentage of the value of the home.
• Is a reverse mortgage a better option than a home equity loan? For many retirees, the income and credit requirements (not to mention the monthly payments) on a home equity loan may be an obstacle. A reverse mortgage doesn’t have these requirements and does not require repayment until the borrower sells or leaves the home permanently.
• Do you want to pass your home on to your children or other loved ones? It’s important to recognize that the outstanding balance on a reverse mortgage loan will need to be repaid when the title changes hands. If your client’s heirs want to keep the home, they may be able to refinance the loan at that time, but it may be necessary to sell the property to repay the loan. Taking the time to discuss this question with loved ones is a good first step in considering a reverse mortgage. Many families find that their children would rather see their parents have a more comfortable retirement, than inherit their parent’s home free and clear.

Even after answering these questions, consider a few words of caution before getting too bullish about reverse mortgages. Using a mortgage debt as a source of funds for investment products, including variable annuities, adds risk to the investor and additional costs associated with the mortgage itself. The federal government, regulators and consumer advocates have discouraged such transactions as being unsuitable for most seniors. Suitability issues like these will continue to get high visibility for all advisors, but particularly those working with retirees. This concern is one of the reasons that the company I work for decided to offer reverse mortgages only as a complementary product to other retirement investment products that we offer, not as a funding source.

This being said, being able to offer the option of a reverse mortgage is a great tool in the advisor’s arsenal for meeting the financial needs of the coming wave of retiring Baby Boomers. In many situations, you can truly help your client by encouraging them to think in reverse. For more information on reverse mortgages, visit www.aarp.org/revmort, www.hud.gov, or www.ftc.gov.
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Dan DeKeizer is vice president and Actuary in MetLife’s Retirement Strategies Group. He has 19 years of experience in banking and insurance issues. For more information on MetLife and reverse mortgages, www.metlifebank.com.