February 2014
Financial Planning and Reverse Mortgages
Here is the final portion of the article that I shared in the two previous posts in this blog. As this article discusses, there are been several changes to the FHA Reverse loan program, effective in October 2013 that limit the amount of funds the borrower can receive but also include additional options.
Investment News: Reverse Mortgages Recast for Financial Planners. Alyssa Gerace 2/19/14
“The three have done extensive research [2] on how the government-insured Home Equity Conversion Mortgage (HECM) product can be used as a retirement planning tool [3].
“Our study considers using a HECM Saver reverse mortgage as a risk management tool in conjunction with a two-bucket investment strategy, coined the standby reverse-mortgage strategy, in order to increase the probability a client will be able to meet predetermined retirement goals,” they wrote in a 2012 article published in the Journal of Financial Planning.
Since then, HUD has issued new rules for HECMs that limit homeowners from borrowing more than 60% of the maximum reverse mortgage loan amount when it closes for a one-year period, Investment News writes. The program changes are meant to ensure loans will cover borrowers’ ongoing expenses, in addition to other common uses such as improving cash-flow.
“A HECM is just another way we can help clients address their retirement income needs,” task force member Marguerita Cheng, a financial planner and chief executive of Blue Ocean Global Wealth, told Investment News.”
A Changing View of Reverse Mortgages
I am going to share another section of the article that I previously posted about how gradually, the financial planning community is becoming more open to the benefits of using funds from a Reverse loan, as part of a financial plan.
They have long held the belief, that these federal and insured loan programs, were inappropriate for their clients and viewed them very negatively. And frankly, they did not understand them at all and in some cases, believed the same myths about ownership and costs as the general public did.
The typical comments I would and still hear, is that the Bank ends up owning the home at the when the borrower dies ( wrong) and that they are too expensive. Wrong, again. And as a matter of fact, I posted a video on my other blog discussing the fees associated with originating a Reverse loan, as compared to traditional financing.
You can take a look at that video and my lovely face by clicking on this link.
http://bit.ly/Yj1fIm
Here is the second of three parts of the article I want to share with you.
Investment News: Reverse Mortgages Recast for Financial Planners. Posted by Alyssa Gerace 2/19/14
‘“We in the reverse-mortgage lending industry find financial advisers are subject to the same myths and misconceptions as the general populace,” Shelley Giordano, director of business development for Security 1 Lending, told Investment News. “We thought if we could bring together some thought leaders from various disciplines, we could focus on what’s new in terms of housing wealth in the retirement distribution phase and help Americans have a more secure retirement.”
Giordano is chairman of the reverse mortgage industry’s Funding Longevity Task Force, which includes members like John Salter, a tax attorney specializing in pension matters; Harold Evensky, president of Evensky & Katz Wealth Management; and Shaun Pfeiffer, a professor of personal finance at Edinboro University.”
Financial Planners and Reverse Loans
The image of the Reverse mortgage as something to be avoided, is gradually changing due to education. It’s been a long and difficult road to overcome the misunderstanding and misrepresentations of the federal loan program, but at last that is beginning to shift.
The Press seems to be more conscious about discussing the positives aspects of the FHA loan and now less time making uninformed, misleading and negative comments than they have in the past.
One area of shift in precetion and acceptance, is within the financial planning community. Their own trade publications have printed many articles in the last two years, explaining why the Reverse loan is an excellent solution to preserve wealth and extend a clients retirement funds for several additional years.
I am going to share an article that discusses this in particular and Financial Planners. It’s a bit lengthy and will will share the remainder of it in subsequent posts.
Investment News: Reverse Mortgages Recast for Financial Planners
Posted By Alyssa Gerace On February 19, 2014 @ 5:06 pm In News,Retirement,Reverse Mortgage | No Comments
“Reverse mortgages could get recast from their commonly-perceived “loan of last resort” role to that of a financial tool for retirement if industry lenders get their way, says a recent Investment News article [1].
Despite more than two decades of being seen as a financial lifeline for seniors who are house-rich, cash-poor, reverse mortgage lenders are hoping research from leading financial advisers paired with new rules from the Department of Housing and Urban Development will change the product’s role, says the article. ”
The 4% Rule VS the 6% Rule
Here is the remaining piece of the summary on a study regarding the use of reverse loans to leverage retirement funds. The original article is very lengthy and detailed, but if someone would like a copy of it, please contact me.
“Additionally, under the “term plan first” method, a client’s net worth could be $429,500 higher at 15 years, Wagner says.
The second strategy is reverse mortgage “term advances over the spending horizon.” While expected net worth under this scenario is less than the first strategy, Wagner says, the loan balance at 15 years is smaller and the 30 years spending success rate is several points higher.
Under this strategy, if the client’s portfolio is invested 70% in equities, the “term advances over the spending horizon” plan would give a 83.2% chance of success of withdrawing 6% annually over 30 years, and at 15 years the client’s net worth could be $282,800 higher.
Reverse mortgages can benefit retirees by supplementing their retirement portfolios with additional funds, however, common misconceptions surrounding the loans continue to be a challenge—one that financial planners must acknowledge in their discussions with clients.
“Today, very few Americans in retirement or about to retire have entered into a reverse mortgage,” says Wagner. “Some clients will resist the use of these products because they consider their home as sacred. However, a reverse mortgage may be considered as another financial planning tool with no stigmas attached to its use.” ‘
Written by Jason Oliva [2]