Financial Planners Need To Take a Closer Look at Reverse Mortgages

Financial planners who specialize in retirement don’t often consider a reverse mortgage to be viable addition to a client’s portfolio, but Investmentnews.com blogger Jeff Benjamin disagrees. Reverse mortgages still aren’t widely endorsed by financial advisors who specialize in retirement income and preservation planning as a legitimate portfolio addition for their clients. But that should change, argues Benjamin. The reason is because reverse mortgages are now more cost flexible and economical for borrowers after some fundamental shifts in the industry’s cost structures were implemented last year. Even after 22 years of being available to homeowners who are aged 62 and older as a solid source of supplementary income, financial planners haven’t put the emphasis on reverse mortgages. That’s probably attributable to the high upfront fees and costs that have up until recently been associated with the transaction. But last year the industry made a significant and collective move to reduce those transaction fees, and for that reason says Benjamin, advisors and consumers alike should be taking a closer look at reverse mortgages as an income vehicle of first resort. In many common circumstances around the country, a reverse mortgage allows a 62 year old retiree the ability to stay in their home and convert their equity into tax-free income, stretching the preservation of their retirement portfolios. Benjamin cites in these paragraphs a typical example of how a reverse mortgage can stretch the value of retirement: “Consider a 75-year-old who is living in a mortgage-free home valued at $350,000 and has a $200,000 retirement portfolio. Assuming a desired after-tax annual income of $27,500, a 6.5% annual retirement account investment return and a 2% annual home value appreciation, turning to a reverse mortgage first would generate total income of $590,000 and fund retirement for 19 years.” However, Benjamin goes on, applying that same criteria to another strategy in which a reverse mortgage is initiated after a retirement portfolio has been spent would fund retirement for only 16 years with a total income of $500,000. The $90,000 is the result of a likely home value market appreciation realized over the course of 19 years. Maybe it’s time for the financial planning industry, especially those who specialize in retirement advising and planning, to take reverse mortgages and the equity-converting model it offers into closer consideration for their clients who will truly benefit. Benjamin reminds us that those costs have fallen drastically. The reverse mortgage industry introduced the new “HECM Saver” option last October as an alternative to charging upfront insurance premium fees. Now, reverse mortgage borrowers can trade a little of their reverse mortgage lending limit for much lower upfront mortgage insurance premiums.. In addition, lenders have reduced their origination fees significantly, and in some cases, all together. Is the new reduced fee system the catalyst for mainstream adoption of reverse mortgages as an income vehicle by retirees and their financial advisors? If nothing else, says Benjamin, it should at least be proof that reverse mortgages need to play a part in the average overall retirement plan.