One of the most common uses of a reverse mortgage is to replace an existing loan (mortgage, HeLOC, etc.)–the primary benefit being the elimination of a mandatory monthly loan payment.
However, some clients are quite comfortable making a monthly payment. When this is the case, a little-known strategy that can have a huge impact on retirement can be employed: establish a HECM and CONTINUE to make monthly loan payments. Let me give you an example of how this works.
Creating a Longevity Plan with the HECM Exchange Strategy
Clients Age 65/65 | $400,000 Home Value | $100,000 Mortgage | $1,000/Month Payment for 13 years
For these clients, making a mortgage payment is not a hardship and they would like to be more prepared for unexpected expenses that may creep up in retirement. After doing some research, they choose a strategy that allows them to establish a reverse mortgage AND continue making monthly payments, except now they pay the reverse mortgage company instead of the forward mortgage company.
- The HECM makes $159,600 available.
- As a requirement of the loan, their existing mortgage balance of $100,000 is paid off in full, leaving them with a $59,600 growing line of credit.
- They continue making $1,000 monthly payments—accomplishing two key things. (1) Their outstanding loan balance decreases (Bottom Line). (2) Their available line of credit increases (Middle Line). The top line shows their appreciating homes value.
Ask the Expert – Dr. Wade Pfau on Making a Payment
Notice the difference that making a monthly payment makes to their accessible line of credit. The power of this strategy is that it takes the monthly mortgage payments the clients would have been paying anyway and uses them to reduce the outstanding balance of the HECM, while simultaneously adding funds to the available and growing line of credit for tax-free access in the future.
This strategy doesn’t require them to change anything except who they are now sending their monthly payment to. They are able create a large reserve fund without any change to their financial behavior pattern.
Best of all, the payments are voluntary. If they want to pay more over the winter months and less during the summer, so they can go to the beach each weekend, they can! If they want to skip a payment, they can. If they want to stop making payments altogether, they can. By using this reverse mortgage strategy, the clients have tremendous payment freedom and flexibility.
For more on the HECM Exchange strategy, see Chapter 10 in The Retiree’s Guide to Housing Wealth.