Retirement Planning

How to Retire Using a Reverse Loan

I have been a Reverse Loan Consultant for almost 17 years and until the last five or so of them, most articles that discussed reverse loans and media pieces were not only incorrect but very negative and certainly created the wrong impression and more than likely, turned off a number of seniors who could have benefited from using  it to provide additional income.

However, we in the reverse loan industry have seen quite an “about face” in the last few years and more and more positive and encouraging articles and media news are promoting the benefits of the FHA HECM reverse loans to the public.

After taking a “beating” for too many years, each day seems to have another article or something on the news that not only is more often correct than it was in the past, but is seriously letting people know that a reverse loan is a good option to use in lieu of drawing down on a retirement fund.

In particular, the Boston College Center for Retirement Research has published a number of studies over the last few years, pointing out the reasons why seniors should not rule out using a reverse mortgage as part of their retirement plan.

And just recently they published a new report addressing the reasons why some seniors are resistant to the idea of using their equity in their home to sustain their lifestyle and to pay for any unplanned medical expenses and that their reasons are not “rational”.

I’m going to share a summary of their findings in the next few posts.

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Seniors and Housing Debt

Although the amount of equity that is retained by American seniors exceeds 5 Trillion dollars, there are many who will not be able to retire because they are burdened with a mortgage payment.

Unfortunately, some seniors applied for Lines-of-Credit or did a traditional refinance on their property and took a lot of funds out at the close of escrow the last several years.

A much better option would have been to apply for the HECM Line-of-Credit and only use the funds as needed and not be obligated for a money mortgage payment.

A new report was recently published by HUD’s office of Policy Development and Research discussing this concern and what options seniors will have in the future to manage their housing debt.

I will post a summary of the findings in the next three posts.

HUD: Reverse Mortgages Provide Solution to Retirees’ Housing Needs

By Jason Oliva

“Baby Boomers and senior homeowners have the potential to reshape the nation’s housing market. But as a growing share of this demographic carries mortgage debt into retirement, they will need to seek additional solutions to improve their financial situations. For many, this could mean tapping into home equity through a reverse mortgage, according to a new report from the Department of Housing and Urban Development.

The broader housing market has shown positive signs of recovery in the years following the financial crisis, but several challenges remain, especially for older homeowners nearing retirement, according to a report recently issued by HUD’s Office of Policy Development and Research.

A rising percentage of older homeowners are carrying mortgage debt as they approach and enter retirement. Among owners aged 65 and older, 40% had mortgages in 2014, according to the Joint Center for Housing Studies of Harvard University.”

 

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HECM Money

Recently a report was published in the Journal of Personal Finance that discussed how using the Tenure payment option available in a Reverse mortgage, could possibly benefit seniors who acquire a Reverse loan.

The portion of an article that I am posting today, is part of a larger and  longer piece and I have previously created three different posts that share it in smaller pieces for the reader.   Here is part !V.

New Research Shows Financial Planning Value of Tenure Reverse Mortgages
Posted By Jason Oliva On March 3, 2016

“With the reverse mortgage options, purchasing a SPIA improves the security of retirement income, but does not increase the income,” the study states. “Combining SPIAs with reverse mortgages provides a way to gain additional retirement income security, but without much impact on the overall level of retirement income.”

Researchers ingrain their analysis around a scenario involving a husband and wife as borrowers, a couple which they believe presents a more typical situation for financial planners. Specifically, researchers assume the couple lives in a $400,000 home and that the husband is 65 and the wife is 63.

Based on August 2015 interest rates, for this couple the initial principal limit they would receive from a Home Equity Conversion Mortgage (HECM) would be $212,000, according to researchers’ calculations based on the reverse mortgage calculator provided by the National Reverse Mortgage Lenders Association.

Under this scenario, a borrowing couple utilizing the reverse mortgage tenure option would be able to obtain $1,130.36 per month. Assuming setup fees were financed ($212,000 – $10,826), the available amount for borrowing would be $201,174.

By comparison, researchers note that a SPIA purchased with $201,174 would pay $955.21 per month, based on market rates as of August 2015 for SPIAs sold directly.”

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BPC Commission on Retirement Security and Personal Savings

Here is the last portion of the article that shares the purpose and concerns of the Policy Center’s new Health and Housing Task Force.    In conclusion it discusses the merits of using money from a Reverse loan to create financial stability for a senior and allow them to remain in the home.

Housing Task Force Sees Merits of Reverse Mortgages – By Jason Oliva – March 30, 2015

“A reverse mortgage is a useful tool to generate capital that people have stocked up over a lifetime in the equity of their home, but it has implications,” Cisneros said. “There are serious things to think about, but it is a tool that deserves a place if properly utilized.”

In a previous report [2] from February 2013, the BPC touched on the topic of reverse mortgages, urging steps be taken to ensure consumers understand the mechanics of these loans, including their benefits and potential risks.

Though it is unclear if the Task Force will target reverse mortgage policy recommendations, the BPC’s Commission on Retirement Security and Personal Savings is looking into the topic of reverse mortgages in a report which is slated for release this sometime this Fall.

“It [reverse mortgage] is a toll in the toolbox,” said former Senator and HUD Secretary Mel Martinez, on contribution of reverse mortgages for aging in place. “As with any other financial tool, there always needs to be a fit for the need as opposed to the opportunity. Good consumer financial empowerment is paramount in any financial transaction.”

Building on the work of the BPC’s Housing Commission, and simultaneously with its Long-Term Care Initiative, the Health and Housing Task Force plans to seek cost-efficient ways to meet the health and housing needs of the burgeoning senior population.

Among its goals will be finding cost-effective ways to modify homes and communities to make independent living viable for senors and identify barriers to home and community-based services.”

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Housing Crisis in the Coming Years

I am going to share the next section of the article that discusses the concerns of a new Housing Task Force that will try to determine where the risks and the solutions are for an aging population.   And Reverse loans are part of that discussion.

Housing Task Force Sees Merits of Reverse Mortgages – Posted by Jason Oliva on March 30, 2015

“While various reports cite seniors’ unwavering desire to remain in their homes for as long as humanly possible, their homes are often ill-suited to permit them to do so. It is through this disconnect where reverse mortgages, which have historically touted their ability to facilitate these desire, claim their role in the broader aging in place picture.

“[Reverse mortgages] are appropriate for some people in some circumstances,” said Henry Cisneros, task force member and former secretary of the Department of Housing and Urban
Development (HUD). “We don’t start with the view that reverse mortgages are dangerous for people and should be avoided.”

Cisneros, who has been a proponent [1] for reverse mortgages in the past, is joined on the Task Force by fellow former HUD Secretary and former U.S. Senator Mel Martinez, and former U.S. Representatives Allyson Schwartz and Vin Weber.

Acknowledging certain people may have been negatively affected by reverse mortgages as a result of bad judgement in the past or influenced by “unscrupulous players,” the commission generally views the loans play a role in helping seniors age in place, but only if used in the right context.”

The remainder of the article discusses the importance of having the correct information about how Reverse loans work and their importance in retirement planning.   Rather than being seen as a loan “of last resort”, it’s important for Advisors and the borrower to thoroughly understand the details of the HECM Reverse loan before making any decisions as to whether or not it is an option to age in place.

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