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CFP® Asks for Colleagues’ Honest Opinion: Is a Reverse Mortgage Right for My Client?

Their Feedback Was an Eye Opener

Shifting Landscape

Below is a real question posted to the Financial Planning Association’s (FPA) forum page along with six advisor responses.  The names have been changed, but the replies are accurate.


The Question

Hello all, I’d like feedback from planners who have used a reverse mortgage as an income source for clients…  I have a client who will have paid her mortgage off in 9 years.  In the meantime, she is in the red on cash flow since losing her job last year.  She is working, but her income is half of what she needs to live.  We can pull from retirement assets to cover costs until her mortgage is paid off, but this is a hit to her.  She is 64, single, and her largest asset is her home.  I would love to hear from someone who has had a similar situation and considered using a reverse mortgage as a stop gap measure of sorts.  I’d also like to hear from others who chose not to use  a reverse mortgage and why.  The client would prefer to keep the house and live there the rest of her life, but if need be, she would consider selling it and buying something smaller so she could have the additional equity for retirement income.  I’d love to hear your thoughts on this.  Thank you. – Karen G., CFP®

Six Responses from Colleagues

  • This sounds like a classic case for a HECM, which should always be used carefully. The well-deserved bad reputation the industry had in the early years has been largely overcome, but animosity lingers.  – Sam V.

 

 

  • If eliminating the current mortgage payment provides sufficient cash flow relief then a line of credit or systematic payments are likely preferable.  The line of credit is particularly powerful. Be sure to understand fully how it works. – Bill S.

 

  • I’ve only done a reverse mortgage twice. Both times, the client had equity in their home and were short on cash flow. With the first one, there weren’t any heirs, so only needed to make sure she understood everything.  It kept her in her home and greatly increased her standard of living. With the second one, I met with the client and all her children to make sure everyone was on the same page.  I don’t think they’re for everyone for several reasons, but in the right circumstance, they can be beneficial.  Good luck!  – Clarice S

 

  • Sometimes reverse mortgages are the right tool; this sounds like it’s such a case.  It will allow her to defer her Social Security to age 70 and get a much larger benefit, which will be valuable if she lives a long time.  It will also allow her to defer her required IRA distributions (though she might want to take some distributions or do some Roth conversions to use her low bracket space). As to anecdotal experience, I know someone in a similar situation.  Her only asset was her home.  She wanted to stay in her home as long as possible, but her income was insufficient to cover her expenses, including the carrying costs of her home.  The reverse mortgage allowed her to stay in her home until she was no longer physically able to stay there.  Without it she would have had to sell her home.  She had children, but her children were sufficiently well off that they were more concerned about her than about anything they might inherit.  – Timothy S.

 

  • She sounds like the perfect candidate for a reverse mortgage.  She is single, wants to stay in her home forever and needs increased net income.  I had a client who retired early at 55 after being diagnosed with terminal cancer.  The good news, it wasn’t terminal.  The bad news, at 72 she was running out of money.  She did a split, some monthly payments (bare necessities) and a line of credit to use as needed for “extras.” – Shelle K.

See how differently advisors are responding to the Housing Wealth question today versus five years ago?  It’s clear that participation in this conversation has grown and an enthusiasm for using All Available Assets has developed.  Notice some of the comments:

  • Should always be used carefully
  • Income is one of several reasons to use a Reverse Mortgage
  • A line of credit or systematic payments are likely preferable
  • Greatly increased her standard of living
  • It will allow her to defer her Social Security

Ask Don Graves

To help Karen further determine if the reverse mortgage is a good option, I’ve run the figures to show the true reverse mortgage impact on her client’s retirement outcomes.

Client Profile

64 | Single | Wants to remain in her home, but concerned that she may run out of savings at current draw rate
$400,000 Home Value
$100,000 Outstanding Mortgage | $900/mn (for the next 9 years)

The Benefits Are Obvious

  • Based on this information, the Home Equity Conversion Mortgage makes around $140,000 available.
  • The first thing that happens is that $100,000 existing mortgage and its subsequent $900/month payments are extinguished.
  • $11,800 a year in liberated cash flow. This could mean, more lifestyle, reducing the draw on savings for more longevity or any number of other benefits. We encourage advisors to use the Housing Wealth Illustrator (below) and have the client write out as many benefits as they can imagine.
  • $40,000 in a growing line of credit (see below)
  • The convertibility of the line to monthly payments at any point in the future (see below)

It’s beautiful. Showing her client how this could work and asking her write it down, strengthens the impact of this strategy.

Thanks again, Karen, for caring enough about your client to be willing to broach the Housing Wealth conversation.

Where Can Advisor’s Start?

The easiest place for an advisor to start is by looking at their existing clients who are at or in retirement and still carrying a monthly loan payment. Recent metrics tell us that that will be between 50 – 68%!  The next part is easy. When you identify those clients, simply ask them “How would retirement be different if they did not have to make a monthly loan payment”  If their answer reflects a certain release of pressure or potential realignment of resources, then they would be a good candidate for a housing wealth conversation. We can provide you with a very simple, customized PDF for you to help facilitate the dialogue.

Accessing the Housing Wealth Illustrator

If you are are a financial advisor and would like to see how simple it is to use the Illustrator to have a housing wealth conversation, please feel free to send me an email using the “Get My Illustration” button below to receive a complimentary, customized  PDF Illustration for your particular client.  It’s real simple and could make all the difference in the world – dg

 

Don Graves, RICP®

Don Graves, RICP®

President and Chief Conversation Starter at HECM Advisors Group/Institute
Don Graves, RICP® is a Retirement Income Certified Professional and one of the Nation’s Leading Educators on the Emerging Role of Reverse Mortgages in Retirement Income Planning. He is president and founder of the HECM Institute for Housing Wealth Studies and an adjunct professor of Retirement Income at The American College of Financial Services. He has helped tens of thousands of Advisors as well as more than 3,000 personal clients since the year 2000
Don Graves, RICP®
Don Graves, RICP®

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