- Our Services
- Publications & Video
- Client Login
Not Your Father's Reverse MortgageSubmitted by Townsend Asset Management Corp. on August 3rd, 2016
The comedian Rodney Dangerfield was famous for his “I get no respect” quips. Some examples:
“I get no respect. The way my luck is running, if I was a politician I would be honest.”
“With my dog I get no respect. He keeps barking at the front door. He doesn’t want to go out. He wants me to leave.”
Rodney would no doubt have some sympathy for reverse mortgages, a financial product that often gets no respect.
What is a reverse mortgage?
It is a loan that is secured by your home; it is only available for homeowners age 62 and older; and allows borrowers to convert some of their equity in their home into income-tax free funds. They may be used to pay off an existing mortgage and eliminate the monthly mortgage payment from a retirement budget. Alternatively, they can generate extra monthly income to supplement your Social Security or pension income.
For most people, reverse mortgages have a well-earned sleazy image and are associated with late-night infomercials, aggressive sales tactics, high expenses and scary stories of widows losing their homes.
Most financial advisors – myself included – generally frowned on the products and thought them only appropriate as a desperate, last-gasp effort, when all other financial alternatives were exhausted. But there have been positive changes made in the reverse mortgage industry that make these products another viable option to consider in anyone’s retirement income playbook.
Just a few years ago, the cost of setting up a reverse mortgage was much higher, but today their setup costs are similar to traditional home mortgages. Often, these costs are added to the cost of the loan, resulting in little out-of-pocket costs.
Protections for borrowers are much better now. The Reverse Mortgage Stabilization Act of 2013 prevents reverse mortgage borrowers from using too much equity too soon. Previously, if only one spouse was 62 or older at the time the reverse mortgage was established, there was a risk to the younger spouse at the death of the older spouse. Now, spouses who were younger than age 62 at origination can remain in the home without having to pay the reverse mortgage balance, as long as they keep up with the property taxes and homeowner’s insurance.
A big fear of retirees is running out of money during their retirement years. For many people, their home is their single largest asset, and a reverse mortgage is a way of tapping into the equity in this asset.
When investment markets experience steep, prolonged declines, such as they did during the 2007-2009 recession, retirees have to continue tapping their shrinking nest egg and the money withdrawn is not around for the hopeful future market rebound.
A reverse mortgage line of credit is a tool that can help manage challenges such as this by allowing homeowners to temporarily tap their lines of credit, thereby permitting more of their retirement money to remain invested.
Other than the initial setup cost, an unused line of credit does not cost the homeowner anything on an ongoing basis. There is some value in establishing the line of credit at the earliest possible date, as the available credit line continues to grow each year, even if the home doesn’t appreciate.
As with any financial product, anyone considering a reverse mortgage should first obtain competent and impartial advice, and consider a reverse mortgage’s cost, complexity and applicability to their personal situation.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com