If you’ve been on any of my webinars, you know that one of the concepts I always highlight is the huge gap between the typical perception of the reverse mortgage and the reality of what one accomplishes. Why does that gap exist?
In 1997, I was president of Habitat for Humanity in Philadelphia, and the board of directors provided me with my first cell phone. A cell phone! You couldn’t tell me that I wasn’t a first-round NFL draft choice. It was such a big deal. However, the phone only did two things: made and received phone calls, period!
Fast-forward twenty years to my son’s “smart” phone. During the time he’s had it, I have seen many texts sent, angry birds die, videos launch, snapchats come and go, and Facebook opinions posted, but the one thing I never saw my son do (until recently) was make or receive a phone call! It would hardly be fair to compare the two “phones.”
See the disconnect? When some advisors think of the reverse mortgage, they envision the equivalent of my 1997 “cell phone.” It was useful and timely for the era, but limited in scope when compared with modern resources. However, today’s newly–restructured Home Equity Conversion Mortgage (HECM) is much more like my son’s smart phone. It has a myriad of applications, or “apps,” that can help advisors create new and powerful retirement outcomes.
Let’s take a look at one of those “apps.”
The Profile of the New Borrowers
One significant outcome of the newly restructured reverse mortgage is that it is no longer ONLY for the house rich, cash poor. In the early years of my practice, AARP had a reverse mortgage video whose tag line was, “If you consider yourself house rich but cash poor, a reverse mortgage could be the answer you’re looking for.” Though this was never indicative of the majority of borrowers, the idea stuck.
Since that time, numerous new strategical uses of the reverse mortgage have been developed—strategies that favor those who have healthy home equity and a healthy portfolio. Although the “house rich, cash poor” borrower can still benefit from a reverse mortgage, they are just one type of borrower.
Let’s take a closer look at the five different types of retirement-age homeowners who are benefitting from the new reverse mortgage:
1. The Constrained
Those who are focused on Survival. These are clients in dire circumstances with little to no other savings or assets and limited monthly income.
2. The Concerned
Those who are focused on Rescuing retirement income. The client’s retirement plan has encountered something unexpected. Perhaps one spouse had planned to work longer but couldn’t, or an unexpected health crisis drains the savings faster than expected.
I once had a client whose wife was a very successful real estate agent. Though she was sixty-two, her business was booming, and she had no intent on retiring until one day when she was suddenly unable to speak. A neurological phenomenon had taken her voice with no medical remedy available. She decided to wait it out and see what would happen, but in the interim, the couple’s retirement plan needed a rescue.
3. The Cautious
Those who are focused on increasing Contingency. In this case, a client has a workable retirement plan but not enough reserved for the unexpected or undesirable: prolonged poor markets, higher-than-expected inflation, unwise portfolio draws during bear markets, etc.
4. The Comfortable
Those who are focused on Improving retirement plans. These clients have a workable (or nearly workable) retirement plan but desire enhancement: increased retirement spending, the creation of a hedge for market corrections, establishment of legacy gifting with asset protection and life insurance.
5. The Carefree
These are the Bill Gates, the Warren Buffets of the world. They are not going to run out of money…ever.
Why would a retired CEO who had $5 million in investments and was living in a $4 million home be inquiring about a reverse mortgage? This client of mine had nearly $2 million in housing debt with a monthly mortgage payment in excess of $20,000.
The newly-restructured reverse mortgage is designed to create new planning conversations from the clients you may consider carefree to the ones you know are not. -dg