Making Sense of Reverse Mortgages Information you need to make a good decision!

October 22, 2013

Reverse mortgages as a financial planning tool

What’s the first thing you think of when your hear the term “reverse mortgage”

Bad?  ripoff?  Wow, Fonzi has gotten old…

What you should start thinking of is financial planning…

The Wall Street Journal recently published an article highlighting a use of a reverse mortgage that I have been recommending for years.  As we learned from the financial crisis, even though you may need money, it is not always the best time to sell your assets. Whether it is stocks or real-estate, the markets move independently of your needs.

For a wealthy, or even not so wealthy, retired borrower, this can obviously present a problem.  Your assets need to last as long as possible and you would like to wait for the market to recover before selling your assets…

You are 62 and you were just laid off.  Social Security is available to you but you know that if you can wait until age 65 that your social security will be substantially higher…

You don’t mind selling the assets, but you want to shift the tax burden of that transaction into next year…

You want to balance out your interest payments with the sale of an asset without harming your cash flow

These are all examples of where a reverse mortgage can be used as a financial planning tool to help buffer the winds of financial change.  Setting up the reverse as a line of credit allows a senior to make a choice of where to draw the assets they need, without impacting their cash flow.

“Retirement is really about cash flow,” says Martin James, a certified public accountant in Mooresville, Ind. in the WSJ article

Traditionally financial planners recommended a home equity line of credit for this purpose, but many homeowners were taught a hard lesson when their credit lines were cancelled by the bank, in spite of perfect payment records, or even though they carried no balance!  One of the benefits of a reverse mortgage is that the line of credit cannot be cancelled.  Then add an additional benefit of no payments being required and you have an incredible planning tool.

This has been studied by financial planners at Texas Tech University.

The researchers used what they called a “standby” reverse-mortgage strategy, meaning the reverse-mortgage line of credit served as a source of readily available cash when retirees’ portfolio values dropped below the level where they could meet their goals.

Using a portfolio worth $500,000 and a home value of $250,000, among other assumptions, the researchers found that using a reverse mortgage’s line of credit significantly improved the chances the portfolio would last through the retiree’s lifetime, because it reduced the risk of having to sell investments when they had fallen in value.

We’ll cover this more later, but maybe now the first thing that crosses your mind when you hear reverse mortgage is… Maybe I should learn more…

To read the WSJ article click here

 

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