Reverse mortgages allow homeowners age 62 or better who own their home outright or who have a small mortgage balance to convert the equity in their primary residence into a liquid, tax-free asset. Borrowers can take their money in a lump sum, a monthly payment, or set up a line of credit. Interest accrues on borrowed funds. Unused lines of credit continue to grow at the same compounded interest rate as the cost of money.
Financial advisers who dismissed reverse mortgages in the past may want to take a second look. Leading researchers believe reverse mortgages could solve some of the income challenges of retirees who saved too little to finance a retirement that could last decades.
Below are the 12. Make sure you download the Summary of the 12 {below} to have for yourself or to handout to your clients.
Pay Off an Existing Mortgage
Using a lump sum from a reverse mortgage to pay off a traditional mortgage balance instantly increases a retiree’s monthly cash flow and reduces portfolio withdrawal needs. “It really improves the odds for retirement success to not carry a mortgage into retirement,” said Wade Pfau, Professor of Retirement Income at The American College of Financial Services.
Replace a Home Equity Line of Credit
Unlike a HELOC, a reverse mortgage line of credit can never be reduced, frozen or cancelled. There are no monthly loan repayment requirements. A reverse mortgage is not due until the borrowers sell the home, move out permanently or die. The estate or heirs can never owe more than the house is worth, even if it is less than the amount borrowed. The Reverse Mortgage line of credit has a built in guaranteed growth factor.
Pay it Off and Pay it Down
Eliminating a mandatory monthly mortgage payment by getting a reverse mortgage can be a huge relief for many. But one little known strategy is to continue making a monthly mortgage payment on a new reverse mortgage. For every dollar you pay, the outstanding balance goes down, but the available line of credit goes up. This, in essence, means you are creating a type of deferred income annuity for the future. With no payment required, you can create financial flexibility month by month.
Protect Your Portfolio
“Should your portfolio decline significantly in value, borrow from the line of credit for your needs, then repay the loan when your portfolio recovers,” said John Salter, Associate Professor of Personal Financial Planning at Texas Tech University. Interest payments are tax-deductible, if retirees itemize their deductions on their income tax returns.
Fund Future Long-Term Care or Income Needs
A 62-year-old couple with no long-term-care insurance may want to set up a reverse mortgage line of credit. With a home worth $625,000, their initial line of credit at current interest rates would be worth $327,375. Left untouched, the equity line would be worth $613,365 in 10 years and $1,149,143 in 20 years. The couple could tap the loan for future long-term care costs, as long as they remained in their home, or to serve as a deferred annuity if they needed additional income in the future.
Create a Social Security Bridge
Supplement income with monthly payments from a reverse mortgage either for a set number of years (term) or for as long as you live in your home (tenure). Term payments can provide an income bridge to allow a retiree to delay claiming Social Security until benefits are worth the maximum amount at age 70.
Manage Taxes
Proceeds from a reverse mortgage are tax-free. Tapping a reverse mortgage can decrease withdrawals from taxable retirement accounts, reducing income taxes and the amount of Social Security benefits subject to income taxes. For higher-income retirees, tax-free reverse mortgage payments can reduce their modified adjusted gross income that can trigger higher monthly Medicare premiums.
Pay Roth Conversion Taxes
Sometimes the only thing preventing a retiree from converting a traditional retirement account to a Roth IRA is the amount of income taxes owed on the converted amount. Tax-free proceeds from a reverse mortgage can pay Roth conversion taxes all at once or over several years, reducing future income taxes and possibly reducing future Medicare premiums.
Buy a New Home
A reverse mortgage can be used to purchase a new home. Rather than using all of the proceeds from a home sale, downsizers can use some of the sale profits and take out a reverse mortgage to make up the balance. This results in a new home without monthly payments and additional cash to add to savings for future needs or to supplement current income.
Gray Divorce Strategy
Older couples can use a reverse mortgage to divide a marital housing asset in a divorce. In one scenario, the spouse remaining in the home can take a lump sum distribution from a reverse mortgage to buy out the other spouse. In a second scenario, the marital home can be sold and each ex-spouse can use some of the proceeds from the home sale. Subsequently, each of them can get a reverse mortgage to buy their respective new homes.
Leave a Legacy Now
Most retirees have some desire to pass on a financial legacy to their heirs. According to the student loan giant Sallie Mae, the cost of higher education continues to grow, as well as increased reliability on family contributions just to keep up. However, in order to maintain and remain viable in this economy, a College education has become a necessity for most. A Reverse Mortgage could allow a grandparent to assist with small monthly tuition stipend, a gift or even a low or no interest loan to their grandchildren.
Get More Out of the Month
Many retirees have a budget that is designed to sustain them over the long haul, but sometimes leaves something lacking month by month. Converting the reverse mortgage into a monthly payment can accomplish two things. (1) It may reduce the amount drawn from savings therefore allowing them to last longer or (2) It could increase the amount that they can spend monthly giving them more enjoyment.
Some Excerpts from Investment News Article by Mary Beth Franklin
{Video} Are Reverse Mortgages for Mass Affluent Clients
{Dr. Wade Pfau and Professor Jamie Hopkins, J.D.}
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
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Categories: Common Usages, Financial, General/Misc, Topics, Uncategorized
Tags: Changes to Reverse Mortgages, HECM Basics
