Reverse Loans and Retirement

In the previous post, I shared the first part of an article that was an interview with Wade Pfau  a Professor of retirement income at the American College in Bryn Mawr, Penn and how he has now become an advocate for the federally insured loan program, after having attended a conference in regards to the benefits of Reverse mortgages.

Here is the second part of the interview that was held with him by Reverse Mortgage Daily on December 11, 2014

“RMD: What were your thoughts about reverse mortgages before the Task Force meeting?

WP: I hadn’t given reverse mortgages proper attention yet. [My view was] really just more of an “I just don’t know a lot about them so I better remain skeptical” approach. You see all those commercials touting the benefits of a reverse mortgage — that’s kind of a red flag in my mind of “well I better remain skeptical about these until I learn more.”

There are a lot of financial products aimed at retirees that aren’t always trustworthy, so it’s good to be skeptical about anything before you dig into it.

RMD: What’s your take on the bad reputation of reverse mortgages?
WP: There are a lot of financial predators out there. The conventional wisdom of reverse mortgages was a sleazy advisor would get [seniors] to tap their home equity and put it all into a shady investment. But the new HECM rules prevent all that from happening.

RMD: How can lenders better market that to the general population?

WP: Reverse mortgages may be really good, but the way they’re promoted [isn’t]. There are a lot of financial products that seem like they’re being oversold.

Sometimes salespeople overdo it and cross the line. Even if their sales pitch is correct, they make [reverse mortgages] sound too good to be true. There has to be a fine line there of explaining the benefits, but making sure to address any potential disadvantages or clearly explain why these benefits exist and that the government is regulating the industry.

RMD: From a consumer’s standpoint, how can a reverse mortgage fit into a retirement income strategy?

WP: I’m basically coming to the opinion that for a lot of people, it’s a pretty good idea to just open a standby line of credit as soon as the older spouse turns 62. Of course, people who are too poor may want to open a line of credit anyway, and for people who are very rich, it’s not going to make much of a difference.

But for the large middle-class, open it and it will grow throughout your retirement. Then you can use that line of credit as a part of your retirement income strategy. Even if you don’t end up needing it for retirement income, there’s this good potential that if you leave the line of credit alone, it can eventually grow to be worth more than the home.

If your home value decreases, your line of credit is going to continue to grow by at least 4.4% and could be higher if interest rates go up. So even if the home price goes down, that makes it easier [for the line of credit] to outpace the value of your home.

RMD: What are the pitfalls of using a reverse mortgage standby line of credit?

WP: It’s not going to be sustainable from the government’s perspective. The strategy could become too popular for its own good and then the government might stop letting the line of credit grow at the rate that it is.

Whoever signs up today [for a reverse mortgage] is going to get this great benefit that may disappear in the future.”

Written by Emily Study

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Wade Pfau, Professor at American College

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