The great Willie Mays died in June, one of the great all-around players of all time. Mays was brilliant in all phases of the game, always able to step in and make an impact wherever he was needed. With a .301 lifetime batting average, 339 stolen bases and 12 Gold Gloves, the guy could do it all.
In today’s game, the value of developing a range of skills has become a bit of a lost art. Players in the modern era tend to specialize and seek greatness in one particular skill, as evidenced by the adoption of the designated hitter role in the National League. But though the true multi-tool player may be harder to find these days, their incredible value should never be underestimated. The same might be said of reverse mortgages.
Most Americans seem to understand that stocks are for growth, annuities are for income and life insurance is there for your loved ones when you die. But what about reverse mortgages? The misconceptions and stigma surrounding these products have been well documented. But even among those who know them well, many still believe they serve a single, generally desperate need.
Reverse mortgages, however, are unique among mortgage products in that they can offer solutions to a range of retirement planning needs. While other single-use retirement planning tools may command the spotlight, the reverse mortgage is a standout for its versatility, just like Mays.
“Like a great manager who leverages all the strengths of the players in their lineup, a mortgage professional who understands the power of a reverse mortgage can put it to work for a variety of client needs.”
Like a great manager who leverages all the strengths of the players in their lineup, a mortgage professional who understands the power of a reverse mortgage can put it to work for a variety of client needs. Let’s look beyond cash flow at some of the lesser-known applications for a reverse mortgage. But first, here is a quick recap of how it works.
How it works
A reverse mortgage is a loan that allows older homeowners with substantial home equity to borrow against that equity and turn it into cash without being required to make a monthly mortgage payment. The most common type of reverse mortgage is government-insured and called a home equity conversion mortgage, or HECM.
These are available to homeowners aged 62 or older who have home equity, generally above 50% on their primary residence. Proprietary versions of the product may have different age minimums, equity requirements and other eligibility qualifications. For simplicity here, let’s focus on HECMs.
Because the balance plus accrued interest is not due until the end of the loan, HECM borrowers do not make monthly mortgage payments. Just like any other mortgage, borrowers retain ownership and title to their home. They are, however, responsible for ongoing maintenance and paying property taxes, insurance and other home-related expenses such as homeowner association or HOA dues.
Unique to these mortgages is a variety of ways for borrowers to transform their home equity into usable cash. In addition to a lump-sum payout, there are multiple over-time payout options, as well as a line of credit that grows over time.
Selected based on the borrower’s specific financial needs and goals, these options are partially responsible for making the reverse mortgage so flexible. Now, here are a few ways a reverse mortgage can be leveraged to serve a range of borrower needs.
Aging in place
The only thing keeping many retirees from realizing their dreams of staying in their homes as they age is the ability to pay for it. A reverse mortgage offers several avenues for filling savings and cash flow gaps.
The cash-out element gives borrowers whose homes need aging-friendly, pricey upgrades like lower countertops, bathroom renovations or new flooring a way of paying for them without tapping investments or cutting into their monthly budget to make loan payments. The right to remain in the home is contingent on paying property taxes and homeowner’s insurance, maintaining the home and complying with the loan terms.
Another barrier to aging in place can be the cost of long-term care. Keeping available equity in reserve in a line of credit gives the borrower a fund to pay for in-home care if and when the need arises.
Downsizing the home
Those who prefer to downsize can still take advantage of a reverse mortgage with a HECM for purchase. These loans function in the same way as regular HECMs, except that instead of using equity already in the home, the new owner makes a substantial equity contribution upfront, essentially moving all or a portion of their equity over to their new property.
New homeowners can use any funds they choose to make that contribution. Many people choose to roll over the proceeds of a home sale.
The contribution covers the downpayment and mortgage for the new home and allows borrowers to enjoy the advantages of a reverse mortgage. These include no required monthly mortgage payments and lower living expenses associated with a smaller property, including lower maintenance and property insurance and taxes.
Market volatility
A risk with any retirement investment portfolio is that it will not be able to withstand market slings and arrows. A reverse mortgage line of credit offers an appealing hedge against negative returns in the first few years of retirement, a critical time for the long-term sustainability of a portfolio. Strategic withdrawals from their lines of credit allow investors to leave investments untouched in turbulent or down markets.
These are just a few of the ways older homeowners have found to make the most of the equity they worked a lifetime to build. With a unique ability to serve borrower needs, the reverse mortgage really does suit a wide range of situations.
As Willie Mays said of his own ability to flex, “They throw the ball, I hit it. They hit the ball, I catch it.” What the borrower’s situation requires, the reverse mortgage delivers. Whether it be an infusion of cash to complete a large, life-changing project or a nest egg for future security, the reverse mortgage has it in the glove.
