Over several decades, reverse mortgages have gone through an evolution of policy and legislative changes that incorporate key protections for borrowers. Thanks to improved regulations and education and a changing financial landscape, these financial tools, once considered questionable by many financial advisors, are now getting a second look.
Here’s what financial advisors see in reverse mortgages that have made them change their minds and start recommending them to their clients.
Safer Than Ever
In the past, multiple factors, including terms that didn’t advantage the borrower, consumer confusion, and a lack of guide rails, led to a poor reputation in the financial community that has been difficult to shake. However, over the past thirty years, multiple safeguards have been implemented to ensure these loans are not used improperly and that borrowers benefit. Here are some of the most notable changes.
- Government-insured. In 1987 the Federal Housing Authority (FHA) passed legislation to insure home equity conversion (HECM) mortgages. This legislation also made reverse mortgages non-recourse.
- Increased transparency. Later legislation required lenders to reveal the total annual costs of a reverse mortgage loan.
- Borrower education. Since 1998, all reverse mortgage borrowers have been required to participate in third-party counseling to ensure they understand reverse mortgage obligations.
- Lender awareness. Lenders must conduct a financial assessment before offering a reverse mortgage to determine if a homeowner can keep up with home maintenance costs, property taxes, and home association dues.
- Limited available equity. Before 2013, borrowers were allowed to take 100% of their proceeds at closing. Current legislation mandates that borrowers can take out only 60% of available funds during the first year.
Client Needs Are Changing
One possible reason for the change in financial advisors’ attitudes toward reverse mortgages is a changing client profile that necessitates finding alternate ways of funding retirement.
Retirement-aged Americans are holding historically high amounts of equity, while at the same time, many people in the same group are lagging in retirement savings and planning. In that excess equity, many financial advisors see an avenue for closing retirement planning gaps. Reverse mortgages offer a safe way of tapping that equity while remaining in their homes.
Not only do reverse mortgages remove monthly mortgage payments, offering retirees the benefit of increased cash flow, but their flexible payout options support a range of strategies that financial advisors can tailor to their clients’ individual needs and financial situations.
4 Ways Financial Advisors Are Using Reverse Mortgages for Their Clients
As financial advisors begin to understand the flexibility and opportunities reverse mortgages offer their clients, they are finding more ways of leveraging them to their clients’ advantage. The following are some of the ways financial advisors are using reverse mortgages as part of larger retirement strategies:
Fund a Roth-IRA Conversion
Converting a traditional IRA to a Roth IRA is a common strategy that requires paying taxes on the existing account balance. Retirees whose portfolios would benefit from a Roth-IRA conversion but don’t have the necessary funds to pay the taxes may use non-taxable reverse mortgage proceeds to pay for the conversion.
Hedge Against Future Risks
A reverse mortgage line of credit functions differently than a HELOC. Once established, the unutilized credit amount grows over time and cannot be canceled as long as the borrower upholds the terms of their loan. Unused credit is not charged interest. This line of credit offers future borrowing power when and if the borrower needs it. During downturns in an investment portfolio, a retiree can access available capital anytime.
Preserve Current Investment Portfolio
Market fluctuations are bound to happen, but a retiree can preserve an investment portfolio with loan proceeds from a reverse mortgage. Using proceeds as an income alternative, retirees retain the benefit of watching their portfolio grow. The retiree leaves the portfolio alone, allowing it to potentially rebound with the market.
Allow Retirees to Age in Place
Having a reverse mortgage is a feasible option to allow retirees to age in place. Retirees can use their homes as assets and leverage the equity to skip monthly payments, use loan proceeds for daily expenses, or fund necessary renovations.
The Reverse Mortgage Recommendation Catch-22
As reverse mortgages help more and more people achieve their financial goals, their reputation continues to improve. But because financial advisors are keen to protect the interests of their clients, many have been slow to even investigate reverse mortgages as a possibility. Without the input of their financial advisors, many people who could benefit don’t learn about opportunities they may have for using their equity to their advantage. This reverse mortgage Catch-22 is slowly correcting itself as the industry’s reputation improves.
If you think a reverse mortgage might help you and your financial advisor hasn’t brought it up, ask! You may be opening a door of possibility not just for yourself but for others who find themselves in a similar situation.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.