Greater research and recent program changes are shedding new light on how using a reverse mortgage as part of a retirement plan may be a smart strategy. The Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, is federally regulated and insured by the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). HECMs make up the vast majority of reverse mortgages originated in the United States. A HECM allows you to tap into the equity you’ve built up in your home, creating liquidity from an otherwise illiquid asset. The loan doesn’t become due until all borrowers have passed away or otherwise permanently leave the home. Some of the key changes since 2013 include better protection for eligible non-borrowing spouses (NBS), and for ensuring borrowers have sufficient funds for taxes, insurance, and property maintenance.1
Wade Pfau, a Professor of Retirement Income and Director of McLean Asset Management, supports the idea of getting a HECM reverse mortgage with a line of credit sooner rather than later. In other words, using a reverse mortgage as part of a retirement plan, rather than as a last resort once all else has failed. Pfau has published a great deal of research on this topic, including a book that came out in 2016. He also frequently speaks about retirement income at national conferences.1
In his recent Forbes article, Pfau states that “Two benefits give opening a reverse mortgage earlier in retirement the potential to improve retirement outcomes, even after accounting for loan costs.” Pfau explains how using reverse mortgage funds can reduce the strain on your investment portfolio by helping mitigate the risk of having to sell your assets in a down market. “Reverse mortgages can help sidestep this risk by providing an alternative source of retirement spending after market declines, creating more opportunity for the portfolio to recover.”1
The second potential benefit of getting a reverse mortgage earlier in retirement is related to the line of credit growth feature. This means that any unused portion of your line of credit grows over time, giving you increased access to borrowing power. This is an important feature of reverse mortgages that consumers may not be aware of.1
Pfau foresees reverse mortgages playing a bigger role in seniors’ retirement plans over time. In his article, he states, “As the government continues to strengthen the rules and regulations for reverse mortgages and new research continues to pave the way with an agnostic view of their role, reverse mortgages may become much more common in the coming years.”1
If you’d like to learn more about how the benefits of a reverse mortgage may fit into your retirement plan, please use our Reverse Mortgage Calculator or call 800.218.1415.
1 Using Reverse Mortgages In A Responsible Retirement Income Plan – forbes.com, by Wade Pfau, 2/21/17, https://www.forbes.com/sites/wadepfau/2017/02/21/using-reverse-mortgages-in-a-responsible-retirement-income-plan/#7c890a7335e5
Author: Meredith Manz