When the Wall Street Journal talks, people tend to listen, and that certainly applies to a subject as frequently misunderstood as reverse mortgages. A year or so ago this article appeared in the pages of this authoritative financial paper, and we have to imagine that it caused a few skeptics to sit up and take notice. It’s called “New Thinking About Reverse Mortgages,” written by financial writer Jeff Brown. He predicts these powerful and versatile financial tools will become more and more appealing to homeowners in the early years of their retirement journey. “Younger retirees,” says Brown, “may benefit from using reverse-mortgage lines of credit as interest rates rise.”
Of course, in the case of a reverse mortgage, “younger” is a relative term, since only those 62 and older can apply. As the Wall Street Journal piece explains, “A reverse mortgage is a type of loan taken against equity in a home, available to borrowers who are at least 62. It requires no monthly payments, with interest charges instead added to the loan balance and paid only after the homeowner sells or dies. The loan can be taken as a lump sum or as monthly income, or as a line of credit, with no interest charges on unused amounts.” Author Jeff Brown points out that it used to be more common for qualified homeowners to wait until they were older to take a reverse mortgage, because older borrowers could typically qualify for bigger loan payouts. But that thinking appears to be changing.
“In recent years,” Brown writes, “more financial advisers have warmed up to the idea of homeowners taking a reverse-mortgage line of credit when they are as young as 62, as a way to boost their nest egg. The key to this strategy is that the credit line grows over time, by amounts tied to the course of interest rates, and the unused portion can be converted to a substantial monthly income years later.” Brown predicts that these credit lines will become increasingly valuable, with both inflation and interest rates widely expected to rise. “Now is an exceptionally good time to be considering adding a [reverse-mortgage] credit line to the retirement blueprint,” says Shelley Giordano, chair of the Funding Longevity Task Force at the American College of Financial Services. With interest rates low, the credit limit on reverse mortgages increases, and if rates rise over the life of the loan, that will add to the growth of the credit line. Giordano calls the growing line of credit “an inflation hedge.”
According to the Wall Street Journal analysis, the strategy of setting up a line of credit and then allowing it to grow unused is sometimes referred to as a standby reverse mortgage, or SRM. A number of financial experts cited in the article have advocated this idea, a few as early as 2012. In the words of author Jeff Brown, some of these academics “recommend drawing from the credit line when investments like stocks and bonds are down, so the homeowner enjoys a steady income and gives other investments time to recover, allowing them to last longer.” Others point out that allowing the line of credit to grow for, say, 20 years can help provide a source of steady income to augment later years of retirement when health care costs may be more likely to spike. That’s all the more reason to start early.
Additionally, if you set up your reverse mortgage now when home values are high, you’re protected against a downturn in prices. “Taking a credit line at an early age could also mitigate the danger of the home’s value falling, a decline that would reduce the amount of credit available through a reverse mortgage taken later,” says the Journal’s Brown. “The credit line grows regardless of changes in the home’s value. If the home’s value soars, the homeowner could scrap the old credit line and take out a new, larger one against the higher value.”
It’s important to note that a reverse mortgage is not the right answer for every retiree, as the Wall Street Journal clearly states. It can limit the amount of equity available for other purposes and make it harder to pass along your home free and clear to your heirs. There are also fees to consider. Nevertheless, financial experts seem to be increasingly bullish. “A reverse-mortgage line of credit can be a saving grace for the baby boomers who simply do not have enough retirement savings” if home equity is ignored, states Professor Jamie Hopkins of the American College of Financial Services. “If home equity is incorporated more strategically in the future, we will see vast improvements in the financial security of retirees.”
Here at AgingOptions our advice to you is to get the facts. Don’t listen to the tales told by uninformed friends and family, and at the same time don’t assume that a reverse mortgage will magically make all your financial and retirement challenges disappear. We strongly suggest that you contact a trusted, objective expert such as Laura Kiel of Kiel Mortgage and find out the truth – pro and con – about a reverse mortgage and how it might apply in your individual situation. Laura is a professional who will lay out a straight, unvarnished analysis for you and let you choose for yourself. And if you do decide to go ahead, Laura will be with you every step of the way.
In a similar manner we at AgingOptions want to be at your side every step of the way on the journey toward planning for a secure and fruitful retirement. That’s why we offer powerful, free seminars called LifePlanning Seminars, featuring the insightful and eye-opening teaching of Rajiv Nagaich. Why not set aside a few hours and join Rajiv soon at a LifePlanning Seminar near you? There’s absolutely no obligation. Click here for details and online registration, or give us a call during business hours and we’ll gladly assist you. It will be our pleasure to meet you soon at an AgingOptions LifePlanning Seminar.
(originally reported at www.wsj.com)