Rich or Poor, Here’s How To Get the Most Out of a Reverse Mortgage

Kathleen Coxwell

March 4, 2016 • 7 minutes

Reverse mortgages offer retirees a number of benefits. Not only can they provide extra cash flow to support a more comfortable retirement, but when used strategically, they can also protect your investment accounts.

Waiting until you’re older works for many folks, but for the wealthy it can be a different story.A reverse mortgage allows homeowners age 62 or older the ability to convert their home equity into tax-free proceeds, which can be used any way they choose. Unlike a conventional mortgage, in which a borrower makes payments to a lender, the cash flow in a reverse mortgage is “reversed,” meaning the borrower receives proceeds from the lender. Borrowers can choose to receive proceeds in a lump-sum, monthly installments, a line of credit, or a combination of these options. How much borrowers receive from their reverse mortgage depends on several factors, including age, interest rates, appraised home value, spouse’s age (if applicable), and the chosen payout method. Choosing the right payment plan, that is, one that aligns with your personal retirement goals, is critical for borrowers in maximizing the potential of their reverse mortgage.

Age Matters

Reverse mortgage payouts are based on a set of calculations that take into account a borrower’s age, among other factors. Depending on the age of the borrower when the loan is acquired, the difference between getting a reverse mortgage sooner rather than later can translate into thousands of dollars. For example, a 62-year-old who is newly eligible to take out a reverse mortgage will not be able to borrow as much upfront as an 82-year-old who has the same home equity in the same interest rate environment. The amount that can be borrowed is determined by a table that lenders use and that is set by the Department of Housing and Urban Development, which oversees the government-insured Home Equity Conversion Mortgage program. The lender does not set the amount; rather, they are set by the HUD table. Borrowers who choose to receive their proceeds in the form of monthly term or tenure payments are most likely able to qualify for larger payments when they are older. Again, the rule is not hard and fast, and the table can change from year to year, but in general, older borrowers can qualify to receive more from term or tenure payments than their younger counterparts. While it would appear that borrowers can truly maximize their total cash flow by taking a reverse mortgage out later in life, there are instances when obtaining a reverse mortgage earlier in retirement can produce substantial cash flow in the long run.

Line of Credit Growth Feature

There’s a little-known feature of reverse mortgages that is slowly but surely starting to catch on among retirement professionals: the reverse mortgage line of credit growth feature. The reverse mortgage line of credit option, when used strategically, has been gaining popularity and acceptance among financial advisors. That’s thanks to recent research, which has demonstrated how a line of credit can dramatically improve the longevity of a retiree’s investment portfolio. If a borrower takes a reverse mortgage line of credit, they can choose to access funds in the credit line immediately or defer withdrawal some time in the future. This deferral allows the available proceeds in the credit line to grow over time. The longer you wait to access the funds, the more you’ll have available. Some people considering credit lines compare a reverse mortgage line of credit to a home equity line of credit. There are some important benefits that apply to the reverse mortgage credit line that are worth noting: first, the lender can’t freeze the credit line as it can with a HELOC. Second, the borrower doesn’t need to make monthly payments toward the loan.

“. . . using a reverse mortgage line of credit at the beginning of retirement. . . can give retirees a 90% chance their savings will last throughout a 30-year retirement.”

When taken early in retirement instead of later in life after other assets have been depleted, a reverse mortgage line of credit provides the highest success rate. Taken earlier, it can help retirees’ savings to last over the course of a lengthy retirement, according to research published in the “Social Science Network” by Wade Pfau, professor of retirement income at The American College in Bryn Mawr, Pennsylvania. Pfau, who also serves as Director of Retirement Research at McLean Asset Management in McLean, Virginia, finds that using a reverse mortgage line of credit at the beginning of retirement, thus letting the loan balance grow over time, can give retirees a 90% chance their savings will last throughout a 30-year retirement. “The advantage of taking a reverse mortgage line of credit earlier is more funds are likely to be available in the future,” says Beth Paterson, a certified reverse mortgage professional with Reverse Mortgages SIDAC in St. Paul, Minnesota. Another benefit to obtaining a reverse mortgage early is to lock in a low interest rate. If rates rise in the future and a borrower waits to get the reverse mortgage, Paterson says there is a likelihood that less funds will be available at the higher interest rate. “So taking advantage of a lower interest rate right now could work to the borrower’s benefit,” she says. Borrowers could also benefit in other ways from taking a reverse mortgage line of credit.

Defer Withdrawals From 401(k)s, IRAs

What most people don’t realize is that reverse mortgages can actually enhance a borrower’s investment portfolio by protecting against the unnecessary depletion of retirement accounts such as 401(k) plans and IRAs. Using a reverse mortgage line of credit as part of a coordinated retirement strategy can significantly help retirees – particularly those with invested assets in the range of $500,000 to $1.2 million. Retirees who are drawing on portfolios like 401(k) or rollover IRAs, can see big benefits according to research published in the Journal of Financial Planning by Barry H. Sacks, a practicing tax attorney in San Francisco. “A small draw from a reverse mortgage credit line at the right time increases the long-term growth of the securities portfolio, such as a 401(k) or rollover IRA account,” Sacks said in a recent webinar hosted by the Financial Planning Association.

“. . .retirees can withdraw anywhere from 5-6% from their retirement accounts each year and still have a greater than 80% chance of their money lasting a 30-year retirement.”

In his research, Sacks highlights the strategy of taking a reverse mortgage line of credit early during retirement, but only drawing from the credit line in years when a retiree’s investments experienced a negative return. By doing so, retirees can withdraw anywhere from 5-6% from their retirement accounts each year and still have a greater than 80% chance of their money lasting a 30-year retirement. This strategy allows your retirement accounts to continue growing untouched, without having to worry about paying early withdrawal penalties or taxes. If you need additional funds, they are available to access via the reverse mortgage credit line. Borrowers using this approach could end up leaving a larger portfolio for their children to inherit, says Paterson. Meanwhile, the reverse mortgage provides them with funds to maintain their current lifestyle. There are numerous benefits to using a reverse mortgage in retirement planning, but it all depends on how this strategy aligns with your personal financial goals. To find out if you’re well suited for a reverse mortgage try our quick Suitability Calculator – or better yet contact a reverse mortgage professional today.

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