What a difference a few years makes! “A decade ago, most financial advisers would roll their eyes at the mention of reverse mortgages,” writes the venerable Wall Street Journal. However, new safeguards and changes to laws governing these financial instruments “have led many advisers and researchers to change their minds about reverse mortgages.”
We recently discovered this article about reverse mortgages on the Wall Street Journal website, adding to the growing chorus of financial experts who have come around to the side of the Home Equity Conversion Mortgage (HECM), better known as the reverse mortgage. We encourage you to read this and other articles as you explore whether or not a reverse mortgage can be part of your retirement plan.
Part of the reason for earlier skepticism about HECM’s, the Journal article suggest, was rooted in what used to be a combination of lax regulation and high default rates. One sobering statistic in the article states that, as recently as 2014, almost one reverse mortgage borrower in eight (12%) was in default on their property taxes or homeowners insurance. New rules codified in the Reverse Mortgage Stabilization Act of 2o13 toughen some of the HECM requirements by preventing homeowners from taking all their equity out at once, and also by requiring borrowers to demonstrate their financial ability to stay current on insurance and taxes. The new rules also enact stronger protection for a non-borrowing spouse.
Now, thanks to these new regulations, reverse mortgages should be safer. The Journal article quotes Professor Stephanie Moulton from Ohio State University who suggests that these rules could cut the default rate on reverse mortgages in half. Moulton also speculates that “these changes may encourage larger banks to re-enter the market, further increasing the credibility of the product and potentially lowering costs.”
So if an HECM is now safer, should you apply? The answer depends on your situation and what you intend to use the money for. Paying off an existing mortgage with proceeds from an HECM can be a good strategy, says the Journal, something more than 60% of reverse mortgage borrowers do. A better strategy may be to open the HECM as a line of credit, using it only for emergencies or in some cases to help during downturns in income from other investments. One advantage of this approach is that the available line of credit generally continues to grow over time, as long as it remains unused, acting as a valuable cushion for the future.
We also found a separate but related article from the CNBC website explaining why it’s a good idea to take out a reverse mortgage now while interest rates are low. Even a small rise in interest rates can dramatically reduce the amount of equity you’ll be allowed to borrow. Today’s low rate climate could provide further inducement to give an HECM prompt, serious consideration.
Whenever a client asks us about reverse mortgages – and this question comes up with increasing frequency – we typically give the same advice: talk with an expert who will walk you through the pros and cons and explore your own unique personal circumstances. Here at Aging Options we work with carefully selected, trusted professionals including Laura Kiel of Kiel Mortgage, a frequent guest on our radio programs. An experienced pro like Laura can tell you whether or not an HECM can be a solid part of your retirement strategy.
As for the rest of your retirement plan, or your LifePlan as we call it, we would love to help you develop a well-thought-out roadmap to guide you to the future you’ve dreamed of. Where will you live? How will you protect your assets? Can you avoid becoming a burden to your loved ones? Are your legal affairs in order? How do you talk with your adult children about your plans and your wishes as you age? These elements and more are part of your LifePlan.
We offer free seminars called LifePlanning Seminars at locations throughout the region, almost every month. Register for one near you by clicking the Upcoming Events tab on this website. We’ll look forward to meeting you! And if you wish you discuss reverse mortgages, call our office and we’ll put you in touch with an HECM specialist who will answer all your questions.
(originally reported at www.wsj.com)