Buffer against market swings

Reverse mortgages allow borrowers to access a portion of their home  equity in a variety of payment options, including a lump sum, monthly  installments or through a line of credit. Of all the different options,  the line of credit strategy has been gaining considerable attention from  financial planners largely due to its unique “growth feature.”

Similar to a traditional Home Equity Line of Credit (HELOC), a  reverse mortgage line of credit accrues interest only on the amount that  is borrowed. An advantage of the reverse mortgage credit line, however,  is that borrowers are not required to make monthly payments to the  lender (although you must still pay your property taxes and insurance).  Unlike a traditional HELOC, a reverse mortgage line of credit cannot be  cancelled or frozen by the lender, enabling borrowers to draw on the  credit line as needed for as long as they live in the home. 

If taken early in retirement and left to “grow” for  several years, a reverse mortgage line of credit can serve as a buffer .  . . when they face market turmoil and negative returns.

If taken early in retirement and left to “grow” for several years, a  reverse mortgage line of credit can serve as a buffer that prevents  retirees from drawing on their investment portfolios in years when they  face market turmoil and negative returns.

Coordinating draws from a reverse mortgage line of credit reduces the  strain on investment portfolio withdrawals, writes Pfau, who published  an extensive research paper detailing the various strategies in which a  reverse mortgage can be used in retirement income planning.

“Retirees are more exposed to investment volatility because  volatility has a bigger impact on financial outcomes when taking  distributions from the portfolio as compared with when adding new funds  to the portfolio,” Pfau says. “Reverse mortgages provide a buffer asset  to sidestep the sequence risk by providing an alternative source of  spending after market declines.”

A reverse mortgage line of credit can also provide other potential benefits for borrowers if obtained early in retirement.

Maximizing your funds

The second potential benefit for opening a reverse mortgage early,  especially when interest rates are low, is that the principal limit a  borrower can draw from will continue to grow throughout retirement,  according to Pfau.

Most of the reverse mortgages found on the market today are insured  by the Federal Housing Administration. Known as Home Equity Conversion  Mortgages (HECMs), the government backing makes reverse mortgages  non-recourse loans. This means that if the reverse mortgage loan balance  grows to be larger than your home value, you will never be required to  pay more than the home is worth at the time of sale.

Because you will never be on the hook for more than your house is  worth, this non-recourse provision can benefit borrowers who end up  living longer lifetimes, granted they continue to live in the home as  their principal residence. Vacating the home for any reason for longer  than 12 months triggers the reverse mortgage to become due and payable. 

Borrowers may particularly benefit from the non-recourse provision if  they obtain a line of credit and manage to live long enough where the  balance in the credit line has grown to exceed the value of their home.

“. . . for sufficiently long retirements, there is a  reasonable possibility that the line of credit may grow to be larger  than the value of the home . . . .”Stanford: Boomers are entering retirement with less savings, greater mortgage debt

Could home equity access be the solution?

November 9, 2018

Alcynna Lloyd

Americans are now living longer  than ever before, and experts predict that a record number of Baby  Boomers will soon enter retirement.

But when compared to past generations, the Stanford Center on Longevity has discovered the landscape of homeownership and retirement in America is changing – for the worse.

In its  report, titled “Seeing Our Way to  Financial Security in the Age of Increased Longevity,” Stanford points  out Baby Boomers are entering retirement with less savings and greater  debt.


The  report points to an increase in mortgage debt among older homeowners as  a concern, noting that in  2012, one-third of homeowners over 65 were still paying off a mortgage –  up from less than a quarter of homeowners in 1998. And, the amount owed  on a mortgage has nearly doubled from $44,000 to $82,000.

“Considering  the vast size of the Boomer population, increased life expectancy, and  the rate at which  today’s Boomers are retiring, being ill-prepared for retirement has  profound implications for the overall well-being of individuals,  families, and society today and for generations to come,” the report  states.

According to the report, in terms of home equity accumulation and total wealth, Baby Boomers are financially  weaker than earlier generations of retirees.

Stanford’s data reveals that in 2014, one-third of Baby Boomers had no money saved in retirement. For  those who did, the median balance was just $200,000 – surely, not enough to foster a comfortable retirement.

Although society’s approach toward retirement has changed little, retirees will now have to stretch  their personal means even further, Stanford’s report said.

“Our  findings illustrate that the majority of American workers from all  backgrounds aren’t on a path  to retire full time at age 65 under their pre-retirement standard of  living,” the report states. “As a result, it’s likely they’ll need to  consider alternative models of retirement, such as working beyond  traditional retirement age, changing one’s standard  of living in retirement, strategies for deploying retirement savings or  some combination of these models.”

For some Baby Boomers looking to supplement their income in retirement, home equity could provide a  solution.

According to the latest NRMLA/RiskSpan Reverse  Mortgage Market Index, aggregate home equity levels for  homeowners 62 and older hit $6.9 trillion in the second quarter of 2018.  This was a $130 billion jump from the previous quarter.

“If  you consider that the typical retiree household might have one or two  incomes from Social Security,  a modest pension and/or limited income from low-yielding fixed-income  instruments, and, perhaps, a diminished 401(k) account, then home equity  becomes their greatest asset and an important resource for funding  their future,” said Peter Bell, president and  CEO of the National Reverse Mortgage Lenders Association.

Alicia Munnell, director of the Center for Retirement Research at Boston College,  told HousingWire home equity is  likely to become an increasingly important part of the retirement income  puzzle, however people choose to tap it.

“People will turn to home equity to supplement their retirement income,” she said. “I am really committed  to this notion that the house has to be part of the answer to the retirement security challenge.”Reverse mortgages for seniors loan expert Shelley Giordano’s book, ”What’s the Deal with Reverse Mortgages?” describes four reverse mortgage “nevers”  and several reverse mortgages definitions to help alleviate common misconceptions: 

You never give up title to your home.

You never owe more than your house is worth.

You never have to leave your home as long as you maintain the property, the taxes on it and the home’s insurance.

You never have to make loan repayments in advance of leaving the home unless you choose to do so.

Pfau’s book explores several viable uses for a reverse mortgage, such as using it to: 

Provide   payments for a fixed period to pay for living expenses while you’re   delaying Social Security as a purposeful strategy to optimize that   benefit.

Pay off a conventional mortgage to reduce monthly housing expenses.

Fund remodeling costs that help you age in place.

Create   a liquid asset through a reverse mortgage line of credit that can be   tapped for emergencies or that grows to be used late in life for  medical  or long-term care expenses.

Pay for premiums for long-term care insurance.

Design   a strategy to reduce “sequence of returns” risk with invested assets.   With this strategy, when the stock market drops, you tap the reverse   mortgage line of credit for living expenses, which buys time to allow   invested assets to recover. After the market rebounds, you can switch   back to withdrawing from your invested assets.

Pay for living expenses if your financial assets become depleted.

Pfau’s   book contains analyses that show it’s best to take out a reverse   mortgage line of credit early in your retirement, before you might  start  tapping it.Of course, reverse mortgages aren’t for everybody,   particularly if you don’t plan to stay in your home for many more  years.  In this case, it may not be worth incurring the up-front  expenses.On  the other hand, if you have substantial home equity, if  your financial  resources aren’t sufficient to enable you to retire and  if you really  want to retire, you’d be wise to explore all of your  options to deploy your home equity 

 CNBC   included reverse mortgage loans in a list of “innovative approaches” to   protecting retirees’ portfolios in down times, citing a financial   advisor who said he and his colleagues would be “remiss” if they didn’t   suggest Home Equity Conversion Mortgages as a potential option.Rob   O’Dell, a certified financial planner in the Naples, Fla. office of the   Coyle Financial Counsel wealth management firm, told the network’s   website that the reverse mortgage industry has “cleaned up this space  to  benefit the end consumer.” “The  HECM positions the portfolio for  longevity, O’Dell said, by having the  client tap the line of credit  instead of assets when the market is  down,” the post notes, echoing an  increasingly popular angle for  promoting the reverse mortgage. “In this  way, assets are preserved and  have the opportunity to keep growing  through the years.” 

 As  the American population ages, experts have increasingly pointed to   home equity as a key source of retirement income — even as many older   homeowners remain hesitant to tap into it for reasons that continue to   confound both academics and players in the mortgage industry.Steven   Sass, a research economist at Boston College’s Center for Retirement   Research, has studied the behavioral roadblocks to home equity   extraction, and concluded in a recent Boston College brief that the  main  culprits are lack of understanding and fear, as RMD recently reported.“There’s   not really a rational reason to avoid a reverse mortgage,” Sass told   RMD in a recent phone interview. “It might be a fairly sophisticated   analysis, but it makes sense for a lot of people.”Sass pointed a   finger at some familiar targets, including the deep-seated aversion to   going into further debt among older folks, as well as the sense of   accomplishment and satisfaction that can come from owning a home free   and clear. But he also mentioned distrust of financial institutions in   general, as well as a general inability to imagine a need for future   cash early in retirement — a key reason many retirees don’t think to   open a reverse mortgage line of credit soon after turning 62.“If  you  have a sufficient income to cover your expenses, is there any great   need to go out and secure this line of credit or get the money?” Sass   asked rhetorically. “So I think people might need some impetus to use a   reverse mortgage.”That impetus could be the only way to convince   older homeowners that a Home Equity Conversion Mortgage is a good idea,   and Sass said the breaking point might start coming earlier and  earlier.  Social Security benefits could retract in the future, he said,  and more  and more boomers are entering their retirement years without  sufficient  cash or investment savings.“The elderly will be increasingly   dependent on savings to support their standard of living, maintain  their  consumption needs,” Sass said, noting that many of them won’t  have  employer-paid pensions or extensive Social Security benefits. “As   households increasingly need to use their financial assets, at that   point, home equity might be viewed as another store of savings and more   households will consider using home equity in lieu of, or in  combination  with, financial outlets. “To really  access your home  equity, the two primary ways are to downsize or to  take out a reverse  mortgage.” 


Reverse Mortgage Can Help with Long-Term Care

04/22/2004 | ConsumerAffairsBy Unknown Author

Reverse  mortgage loans have the potential to pay for long-term care at home,   according to a study released by the National Council on the Aging   (NCOA). Theres been a lot of speculation whether reverse  mortgages  could be part of the solution to the nations long-term care  financing  dilemma, said NCOA President and CEO James Firman. Its clear  that  reverse mortgages have significant potential to help many seniors  to  pay for long term care services at home.In 2000, the nation  spent $123  billion a year on long-term care for those age 65 and older,  with the  amount likely to double in the next 30 years. Nearly half of  those  expenses are paid out of pocket by individuals, and only 3 percent  are  paid for by private insurance; government health programs pay the  rest.  According to the study, of the 13.2 million who are  candidates for  reverse mortgages, about 5.2 million are either already  receiving  Medicaid or are at financial risk of needing Medicaid. This  population  would be able to get $309 billion from reverse mortgages that  could  help pay for long-term care. Weve found that seniors who  are good  candidates for a reverse mortgage could get on average $72,128.   These  funds could be used to pay for a wide range of direct services  to help  seniors age in place, including home care, respite care or for   retrofitting their homes, said Project Manager Barbara Stucki, Ph.D.   Using reverse mortgages for many can mean the difference between  staying  at home or going to a nursing home. The study is part of NCOAs   National Blueprint for Increasing the Use of Reverse Mortgages for   Long-Term Care, to be published in June. The blueprint will offer new   insights into the potential market for reverse mortgages and   recommendations for administrative action, regulatory changes, consumer   protections, and demonstration programs.Reverse mortgages are a   special type of loan allowing people aged 62 and older to convert  equity  in their home into cash while they continue to live at home for  as long  as they want.“Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance. Eighty one percent of households in the U.S. with   homeowners age 62 and older own their own homes and many own them free   and clear.Seniors can choose to take the cash from a reverse  mortgage  as a lump sum, in a line of credit or in monthly payments. If  they  choose a lump sum, for example, Stucki said that they could pay to   retrofit their home to make kitchens and bathrooms safer and more   accessible  especially important to those who are becoming frail and in   danger of falling. If they choose a line of credit or monthly  payments,  an average reverse mortgage candidate could use the funds to  pay for  nearly three years of daily home health care, over six years of  adult  day care five days a week, or to help family caregivers with   out-of-pocket expenses and weekly respite care for 14 years. They could   also use it to purchase long-term care insurance if they qualify. 


Women Face Deep Disadvantages in Retirement

Reverse,HECM,News,NRMLA,Reverse Mortgage |  2 Comments  NEW   YORK — Women account for a disproportionately large chunk of retired   Americans, but shoulder a disproportionate amount of the burdens that   older folks carry as they age.Linda K. Stone, an actuary and a  senior  fellow at the Women’s Institute for a Secure Retirement (WISER)  in  Washington, D.C., on Tuesday laid out some stark statistics in a  panel  discussion at the National Reverse Mortgage Lenders Association’s   eastern conference and exposition in New York City. Women don’t  just  earn less because of the enduring pay gap — they also take extended   time off to take care of children or other family matters, clocking an   average of 12 years out of the labor force. “That’s going  to have a  big impact on your Social Security income,” Stone said, as  Social  Security calculates benefits in part on the amount of time one  spends  in the workforce. In addition, women are far more likely  to work  part-time during their careers in order to juggle childcare, and  even  those who work full-time might have to decline promotions or  positions  that require significant travel, potentially restricting  access to  employer-sponsored retirement plans and hindering their  ability to  build significant quantities of retirement savings.And  after a lifetime  of these structural and social disadvantages, women  often find  themselves alone in their golden years: There are 6 million  more men  than women above the age of 65, Stone said, as men generally  have  shorter life expectancies.“For most women, widowhood is  inevitable,”  Stone said, and often for an extended amount of time:  15-year periods  of widowhood are not uncommon.Once the husband is  gone, the widow loses  his Social Security benefits, and may have to  endure health problems  alone — often after providing care to their  ailing husbands toward the  end of their lives. And while many couples  plan for a long retirement,  Stone pointed out that older married folks  tend to only think about  their life together as a couple, and not about  what might happen when  one of them dies.Faced with these facts,  reverse mortgages can be a  significant part of women’s retirement  planning, according to Lorraine  Geraci of Finance of America Reverse.  After a presentation touting the  benefits of the Home Equity Conversion  mortgages over other options,  such as a home equity line of credit or  sharing housing with other  older women, “Golden Girls”-style, Geraci  said the key to marketing  reverse mortgages to older women is a matter  of semantics.Instead of  talking about “long-term care,” she said,  use “extended care,” and note  that reverse mortgages can allow adult  children to provide care for  their elderly mothers in the family  homestead. To fight the stigma of  HECMSs as loans of last resort, talk  about how the products can  “sustain longevity,” “maintain a lifestyle,”  or “increase the wealth”  of an older borrower when pitching reverse  mortgages — specifically the  HECM line of credit — to widows and other  potential clients.“All of us  should be selling these like crazy,” Geraci said of the reverse  mortgage line of credit.Stone discussed another “economic shock” for  older women: divorce. As RMD reported   earlier this month, “gray divorce” is on the rise in America, with   split rates among older Americans rising faster than those in any other   age group. Divorced women might lose out on their husbands’ retirement   plans, though Stone said that access to pensions or other defined   benefit plans can often be negotiated as part of the divorce   proceedings.In addition, people who who have been married for  more  than 10 years can use their ex-spouses’ work histories when  determining  Social Security benefits, with husbands generally having a  more  favorable benefit calculation than wives. Stone joked that she  often  tells women who have been married for nine and a half years but  are  considering divorce to hold their horses.“It may be financially better  for them to hang in for those last six months,” Stone said.