In light of the Reverse Mortgage Stabilization Act of 2013 as well as many other changes to the product, some advisors are realizing how to utilize a reverse mortgage as a retirement planning tool to help people extend their nest eggs once they retire, according to a recent article from Investment News.
This specific strategy is not just for those people who are in dire straits, but for those who want a solid plan to feel more comfortable as they age.
In the San Francisco Bay area, a woman who recently retired had her home paid off at the $600,000 value she purchased it for 12 years ago, but now with the increase of home prices in her area, her home is worth $900,000.
“Rather than take money out of my IRA when it is low, I thought I could take money out of my house when it is high,” said homeowner Carolyn Dayton, in the article.
This is how people are using a reverse mortgage as a retirement strategy. It is most valuable if a person opens a reverse mortgage line of credit at the earliest age possible and preferably when there are low interest rates, the article states.
Some advisors dismissed reverse mortgages in the past, but with these new and creative ways people can potentially use them, they are worth another look to help advisors improve their clients’ retirement security.
Another important aspect to point out, and further educate people on who aren’t familiar with reverse mortgages as retirement tools, is the upfront mortgage insurance premium.
“The upfront mortgage insurance premium has been slashed from 2.5% to 0.5% of the loan amount as long as the borrower taps less than 60% of the available balance in the first year,” the article writes.
Before these changes, reverse mortgages were expensive and only used in cases where there weren’t really any other options left.
In the past, there weren’t many people who even carried their mortgage into retirement, the article explains, which is why people may need to start looking into alternatives to handle their mortgages in retirement.
In 1989, of people ages 65 to 74, only 11% of homeowners had a mortgage and the average balance was $29,000. In 2013 though, there were 43% of homeowners from that same age group who were carrying mortgages and the average balance was $136,000.
A study by The American College, cited in the article, found that 83% of people between the ages of 55 and 75 want to stay in their current home as long as possible, but only 14% of those surveyed said they had considered a reverse mortgage.
It all comes down to education. There are advisors out there who still wouldn’t advise a client to even think about a reverse mortgage until they are almost out of funds, but if they were aware of the creative ways it can be used, the perceptions of the product could change drastically and ultimately help people live more comfortably in retirement.