Your clients’ stocks are down. Their house is still up. They’re retired and plan to stay at home.
All right, maybe now it’s time to look at a reverse mortgage.
The S&P 500’s slide of almost 20% year-to-date is giving a number of retirees a sinking feeling that they may need an alternate revenue source in the days ahead. It’s not that they’ve given up on stocks and their long-term ability to rebound. Not in the least. They just think it may take some additional time for them to climb back from their current depths before taking the tax hit that accompanies a sale.
And time, money and taxes are the primary ingredients when it comes to retirement planning.
“When stocks are down significantly, the concept of an alternative revenue source such as a reverse mortgage may make sense for qualified borrowers, especially when you couple that with today’s home values at all-time highs,” said Stephen Resch, vice president of retirement strategies at Finance of America Reverse. “Using your home’s equity as an alternative revenue stream can help homeowners ensure there is cash available to pay bills and address other important financial needs, while at the same time giving their investments time to recover.”
Reverse mortgages are a type of loan that allows seniors to tap their home equity, as a lump sum or line of credit, without having to make out-of-pocket payments. As with any mortgage, the available reverse mortgage loan amount is based generally on the value of the property. Given the rapid rise in home prices across the U.S. over the past few years, that’s why now would be a good time to consider a reverse mortgage — put differently, selling your home at the top while still living in it.
“Once the reverse mortgage is in place, the amount of loan proceeds are locked in, so even if the value of the property were to decline, it would have no impact on the available reverse mortgage proceeds,” Resch added. “And, because a reverse mortgage is a nonrecourse loan, neither the borrower nor their heirs will ever owe more than the value of the property.”
This is a key point for anxious retirees, of course, especially considering the widespread misuse of reverse mortgages leading into the housing crash and ensuing Great Recession. Over 100,000 of the loans were sold prior to the collapse of the housing market in 2008, leading to a post-crash wave of foreclosures, evictions and bankruptcies, generally among minority and elderly borrowers who were unaware of the necessary paperwork and other parameters necessary to satisfy the loan.
Back then, the borrower only needed to be 62 years old with a dash of equity in their home and a pulse in their wrist. It was an easy loan of last resort, often predatory. Put simply, the borrower took the money (for good or bad) and the bank ran away with their homes.
With those lessons having been learned the hard way, it’s different this time around. The government has tightened regulation of the loans. And lenders would rather not be caught with their hands in the cookie jar a second time around, even for the still sizable, though now capped, fees. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. Home equity conversion mortgage origination fees are capped at $6,000.
Most importantly, today’s reverse mortgage borrowers need to prove to an independent counsel that the cash will not be used for a short-term bailout or to speculate on cryptocurrencies or the like. Instead, reverse mortgage prospects need to demonstrate their ability to pay their taxes and insurance, maintain the property, and be responsible with their credit obligations — like any other homeowner.
“The reverse mortgages issued before the housing crash and those on the market today are nearly unrecognizable when you consider the new guidelines and safeguards that are in place,” Resch said, adding that another safeguard is the actual loan amounts, which are “structured so that unless a worst-case scenario occurs, the borrower should always have an equity position in their home, even if they never make a payment.”
Sold yet? Well don’t be. Even if the time seems right for retirees to tap into their homes for steady cash when the market seems so unstable, some advisers urge caution, or at least the exploration of alternative sources of funding before agreeing to a reverse mortgage.
“Stock market volatility makes accessing home equity more attractive, especially in regions that have seen significant real estate appreciation. However, as older homeowners seek to transfer wealth in their later years, using a reverse mortgage to address short-term liquidity needs may drastically reduce their ability to provide a meaningful amount of capital to their families,” said Ashley Bete, founder and CEO of Leap Analytics, a provider of home equity agreements.
A home equity agreement is an alternative method for tapping into the value of one’s home in which a homeowner receives a lump-sum payment from a private investment company in exchange for a portion of the existing equity in the home.
Joy Budnik, a certified financial planner with Jackson Square Capital, doesn’t think there has to be a mutually exclusive decision between selling off one’s entire stock portfolio and relying on a reverse mortgage to meet retirement needs.
“I don’t think it’s an either-or situation. What should make anyone uneasy is a family getting into a position where money is owed on the loan after the retiree passes away, and there’s no way to create liquidity within the estate without selling the home,” Budnik said. “This is a concern because the reverse mortgage must be fully paid off when the borrower passes away, unlike a traditional mortgage.”
Budnik thinks a retiree’s assets should work in concert to meet his or her needs. “I don’t think it’s fair to rely solely on home equity or a stock portfolio to generate income,” she said. “Consider opening a reverse mortgage line of credit for lumpy expenses or those times when the rest of the retirement portfolio falls short of covering the retiree’s needs.”
Nick Lamb, a senior financial adviser with SageView Advisory Group, echoes Budnik’s sentiment, saying that retirees or those nearing retirement should already have a solution in their portfolio to help raise cash quickly if needed.
“If the portfolio is diversified enough, they can choose from holdings that have actually increased in value this year, such as commodities. Or they can choose from investments that are slightly down like bonds, which are down between 5% and 10% while stocks might be down 30%,” Lamb said. “That said, if they had already identified a reverse mortgage as an inevitability prior to the recent market volatility, now may be a good time to consider that option as housing prices are high.”
