Mark Fuchs leads business development for Innovative Equity Solutions.
He can be reached at firstname.lastname@example.org
In April 2015, new rules were implemented to help prevent previous miscues often associated with reverse mortgages. These changes have made the product a viable, safe option for most senior homeowners to at least consider.
While it remains true that entering into a HECM mortgage is not a suitable financial decision for all retirees, for a large percentage a reverse mortgage can be properly utilized to significantly improve retirement income security.
Individuals and industry leaders need to better understand how reverse mortgages can be effectively used. While there are countless reasons why an individual might seek out a reverse mortgage, here are just a few great techniques in which reverse mortgages can be strategically used to improve a retirement income plan.
• Defer Social Security Benefits. If you needed income at 62 when you retired but didn’t want to take Social Security early, you could take a payment option from a reverse mortgage to provide you with the same amount of income in order to be able to defer Social Security.
The reverse mortgage will likely be charging a rate around 4.5 percent in today’s market while Social Security gives you guaranteed increases of 7 to 8 percent per year when you defer benefits. Anyone that is concerned about longevity and outliving their money should consider deferring Social Security.
• Reduce Sequence of Returns Risk. Sequence of returns risk is one of the biggest risks retirees face when trying to withdraw money from a retirement portfolio and make the money last for their entire retirement.
While your stocks might average 8 percent over 30 years, you might only be able to withdraw 4 percent each year due to a poor sequence of returns in which you experience a lot of negative returns early in retirement.
Tapping into your home equity through a reverse mortgage HECM line of credit can be an effective way to reduce your sequence of returns risk and avoid selling your investments when they drop in value.
For example, you can set up a HECM line of credit for a few thousand dollars at age 62. The line of credit will be guaranteed and will grow at a set interest rate.
If you do not borrow any money then you will not owe the bank anything more after the initial set up fees. But let’s say the market drops 30 percent next year, would you rather sell your stocks that are down 30 percent to get your retirement income or would you rather borrow from your home equity at 3 to 4 percent interest?
The answer is clear. You would be much better off using your home equity in a down market year. Doing this could substantially increase the sustainability of your retirement portfolio and help make your money last for a lifetime.
• Cash on Hand. We have no way of planning for any of the many dangers that could disrupt even a well-planned fixed income retirement plan. In today’s reverse mortgage market, most banks offer closing costs than were typical up to five years ago. Liberty Home Equity offers a no closing cost line of credit, so it cost you nothing to improve your cash flow problems and gain financial security.
A reverse mortgage line of credit is guaranteed by the FHA so a bank can never reduce your line of credit as happened to many homeowners after the crash in 2008. In fact the unused portion of a reverse mortgage line actually grows at about 5 percent per year. For example, if you open a $200,000 line at 65 years old and do not need it or use it for the first ten years, the line will have increased to a whopping $325,779 for you to use at your discretion.
The payment terms are great also. You pay what you want, if you want, when you want. Of course like any other mortgage, the unpaid balance of the loan would be paid off upon sale of the house.
The new rules have certainly opened the eyes of the financial services industry to the many benefits of accessing and using a reverse mortgage as a single component of a comprehensive retirement plan.