Using Reverse Mortgages in a responsible retirement Income Plan discussion.

[2HOTinPHX]

Hello all,

I have seen a few brief reverse mortgage discussions here regarding some specific situations and thought perhaps a more general discussion might be useful. I think the general consensus is to avoid them if possible and only use as a last resort for various reasons. Probably some of us are planning to use our homes equity for long term care if needed at some point way down the road. I know some people that might benefit from considering a reverse mortgage but due to the negativity surrounding them they wont even discuss the option, so we don't. I have just started researching this subject a little more closely to become more informed. A YouTube video popped up with an interview with Dr Wade Pfau who has written a book on reverse mortgages. He notes reverse mortgages can look expensive in isolation. But reverse mortgages should not be viewed that way. We need to focus on their overall contribution and interactions with other retirement assets as well.

Link to video, warning it is kind of long:

Dr Wade Pfau website:

Retirement Researcher | Using Reverse Mortgages In A Responsible Retirement Income Plan

Though reverse mortgages have long held a bad reputation, research and public policy in recent years are shedding new light on their potential uses in retirement.

retirementresearcher.com

He discusses HEMC's there:
Copied this part from his site: Reverse mortgages have transitioned from a last resort to a retirement income tool that can be incorporated as part of an overall efficient retirement income plan. Two benefits give opening a reverse mortgage earlier in retirement the potential to improve retirement outcomes, even after accounting for loan costs.

First, coordinating retirement spending from a reverse mortgage reduces strain on the investment portfolio, which helps manage the risk of having to sell assets at a loss after market downturns. 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.

The second potential benefit of opening the reverse mortgage early—especially when interest rates are low—is that the principal limit (the overall eligible amount consisting of any loan balance and remaining line of credit) that you can borrow from will continue to grow throughout retirement.
I am thinking of getting his book:
From the Amazon book description: Amazon.com
*This is the Updated 2024 Edition Made Available in January 2024* Reverse mortgages are an important retirement planning tool. This book provides an up-to-date understanding about reverse mortgages and how to use them as part of a complete and responsible retirement plan.

I am a professor of retirement income. I may be the only author of a reverse mortgage book who does not work within the reverse mortgage industry. My focus is on finding ways to build strong retirement plans, and this is the perspective I bring to reverse mortgages.

I know that reverse mortgages can look expensive in isolation. But reverse mortgages should not be viewed that way. We need to focus on their overall contribution and interactions with other retirement assets as well.

Retirement is different from what people are accustomed to when working. Risks change. Retirees must sustain spending while not knowing how long their funds need to last, while managing the risks of a market downturn that can permanently derail a retirement portfolio, and while also being ready to manage unexpected spending surprises.

Reverse mortgages can help to manage these retirement risks by providing an additional resource to support spending and to coordinate with other investments assets.

My overarching interest is in building efficient retirement income plans to support the most spending potential for assets, both during life and as a legacy for the next generation. I demonstrate with case studies how reverse mortgages can contribute to better retirement outcomes in numerous ways:

- Coordinate between spending from the investment portfolio and from the reverse mortgage to better protect investments from market volatility

- Avoid the additional burden of fixed mortgage payments in retirement by refinancing a traditional mortgage with a reverse mortgage

- Pay for home renovations to help you comfortably age in place with the home you love

- Build a bridge to support getting the most lifetime value from Social Security benefits

- Use the reverse mortgage as a tax-free spending resource to better manage your taxable income.

Anyone else investigating or experienced with this topic please share your thoughts here.
- Use the growing line of credit as a protective hedge for your home value or as a source of reserves to cover unexpected spending needs

This book provides the basics for how reverse mortgages work, why they work better when interest rates are low (unlike every other retirement tool), what their growing line of credit means, and how they help to manage investment volatility.

Reverse mortgages---when used correctly---can provide an added layer of security for retirees by creating flexibility for their assets. Opening a reverse mortgage earlier in retirement and using it in a thoughtful manner is generally more effective that treating it only as a last resort option.

Those who understand whether and how to fit a reverse mortgage into their retirement plan will have an important edge in achieving a financially secure retirement. This book shows you how.

I have not read the book yet but considering it. Please share your thoughts and experiences here.

 

[2HOTinPHX]

More Info HEMC's

https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome
From above website:
HOME EQUITY CONVERSION MORTGAGES FOR SENIORS
Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to remain in their homes or supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is only available through a Federal Housing Administration (FHA)-approved lender. The HECM is the FHA's reverse mortgage program that enables you to withdraw a portion of your home's equity to use for home maintenance, repairs, or general living expenses. HECM borrowers may reside in their homes indefinitely as long as property taxes and homeowner's insurance are kept current.

The amount that will be available for withdrawal varies by borrower and depends on:

• Age of the youngest borrower or eligible non-borrowing spouse;
• Current interest rate; and
• Lesser of appraised value or the HECM FHA mortgage limit or the sales price.

If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.

You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
To learn more about FHA's HECM program use above link.

 

[ShokWaveRider]

IMHO there is never a good reason for a reverse mortgage unless one is really broke. However, there maybe a reason for some to go that route but NOT in our current high interest rate environment. Perhaps if we get back to 0% rates, but not now.

 

[Koolau]

I would think just about anyone needing enough money to take out a reverse mortgage and could qualify for one would qualify for a HELOC. Unless you have no intention of repaying the RM, a HELOC makes more sense to me but I'm no expert and have never seriously considered either type of loan so YMMV.

 

[MarieIG]

Reverse Morgtage Investopedia -

Investopedia contains an interesting article on reverse mortgages. If one has a non-borrowing spouse (which is discussed in the article) that is something to consider.

 

[latexman]

Our plan does not include a reverse mortgage. It seems to me if one wants to live larger, they can do so by slowly giving their home away. There is probably a place for this is some folks lives, but to me it feels similar to keeping up with the Jones' by using credit card debt.

 

[Teacher Terry]

I know 2 people that did this because they were broke. There’s ways that the bank can foreclose so a smart person would have a lawyer read all the documents. I wouldn’t ever consider it.

 

[jazz4cash]

I would think just about anyone needing enough money to take out a reverse mortgage and could qualify for one would qualify for a HELOC. Unless you have no intention of repaying the RM, a HELOC makes more sense to me but I'm no expert and have never seriously considered either type of loan so YMMV.

I think there are many folks with lots of equity but very little savings or income. Their income and assets are too low to get a HELOC.

 

[2HOTinPHX]

Reverse Mortgage vs. Home Equity Loan vs. HELOC: What's the Difference?

If you have equity in your home and need more cash, a reverse mortgage, home equity loan, and home equity line of credit are great options

www.investopedia.com

here is a good read on comparing options Reverse Mortgage vs. Home Equity Loan vs. HELOC: What's the Difference?
This was clipped from above:

KEY TAKEAWAYS​

• Unlike a first mortgage, for which you make monthly payments to the lender, with a reverse mortgage, the lender pays you.
• A reverse mortgage lender eventually sells the home to recover monies paid out to the homeowner, with any remaining equity going to you or your heirs.
• A home equity loan involves a single lump-sum payment that is repaid in regular installments to cover the principal and interest (which is usually at a fixed rate).1
• Like credit cards, HELOCs let you draw on your line of credit when you need it and only pay interest on what you use. HELOCs generally have variable interest rates lower than those of credit cards because they use your home as collateral.1
• All three debt instruments have advantages and disadvantages that homeowners need to take into consideration to determine which one is right for them.

 

[SecondCor521]

Hello all,

Note: I've selectively removed text from your OP that I don't feel the need to respond to. Some of what you've written and I've quoted is from Dr. Pfau or Amazon; hopefully it remains clear even when I've edited out parts.

Overall, a HECM can work for some people in some situations: mostly those who weren't able to fully prepare for retirement and are very very certain that they will be able to die in their home. But I think there are better choices.

Reverse mortgages have transitioned from a last resort to a retirement income tool that can be incorporated as part of an overall efficient retirement income plan. Two benefits give opening a reverse mortgage earlier in retirement the potential to improve retirement outcomes, even after accounting for loan costs.

My focus is on finding ways to build strong retirement plans, and this is the perspective I bring to reverse mortgages.

I don't see how borrowing against one's typically largest asset represents strength.

I know that reverse mortgages can look expensive in isolation. But reverse mortgages should not be viewed that way. We need to focus on their overall contribution and interactions with other retirement assets as well.

Retirement is different from what people are accustomed to when working. Risks change. Retirees must sustain spending while not knowing how long their funds need to last, while managing the risks of a market downturn that can permanently derail a retirement portfolio, and while also being ready to manage unexpected spending surprises.

All true, but none of those things mean that a HECM is the best solution.

Reverse mortgages can help to manage these retirement risks by providing an additional resource to support spending and to coordinate with other investments assets.

I don't view borrowing as a resource. I view it as delaying reckoning for poor planning (or bad luck for folks who maybe medically retired early or something). At best it can be a short term tax management tool, but in those cases a HELOC is a far cheaper and flexible alternative.

My overarching interest is in building efficient retirement income plans to support the most spending potential for assets, both during life and as a legacy for the next generation.

This is the second use of "efficient". To borrow from The Princess Bride, I don't think that word means what Dr. Pfau think it means.

Spending your home equity doesn't leave it as a legacy for the next generation. It also doesn't preserve it in case you need it to pay your CCRC entry fee or LTC.

I demonstrate with case studies how reverse mortgages can contribute to better retirement outcomes in numerous ways:

- Coordinate between spending from the investment portfolio and from the reverse mortgage to better protect investments from market volatility

Presumably he means draw from the HECM when the market is low. A reasonable idea in the short term, but lots of practical problems result from doing so. Maybe he addresses them in his book and/or case studies.

- Avoid the additional burden of fixed mortgage payments in retirement by refinancing a traditional mortgage with a reverse mortgage

I avoid fixed mortgage payments in retirement by paying off my house.

- Pay for home renovations to help you comfortably age in place with the home you love

Pay cash or don't do them. Borrowing for large expenses late in life adds risk (or locks you into a home).

- Build a bridge to support getting the most lifetime value from Social Security benefits

I built a bridge to SS by saving in taxable and doing a Roth pipeline.

- Use the reverse mortgage as a tax-free spending resource to better manage your taxable income.

Lots of other ways to manage taxable income. And spending on a HECM has high fees, destroys home equity, and can maybe lock you into your home. (Full disclosure: I don't know how HECMs work when one spouse needs assisted living or memory care or nursing home services. What happens to the other healthier spouse?)

- Use the growing line of credit as a protective hedge for your home value or as a source of reserves to cover unexpected spending needs

I don't need a protective hedge for my home value. My home value is what it is, regardless of whether I have a HECM or not. If Dr. Pfau is suggesting a HECM as home value arbitrage a la a typical mortgage, I don't think the risk associated with a HECM is a good idea for most retirees.

Also, I have cash and investment reserves for unexpected spending needs.

I have not read the book yet but considering it. Please share your thoughts and experiences here.

See above.

 

[Flieger]

All of the statements from SecondCor521 in post #10 above are true. As such, those statements also make a case for use of Reverse Mortgage. Not everyone was 1.) "Smart enough" or had the knowledge or income to plan effectively or pay off of home, 2.) as someone noted in another post, had the luck to make it to T0 if they did have a good plan.

I'm not dissing what SecondCor521 is saying, jut recognizing that while suboptimal, a reverse mortgage might be a good plan.

The biggest concern to me, and what I think I* (and everyone considering this ) should ask themselves honestly, is whether you have had a problem with credit your whole life, and whether as such this is just a bid to "keep up the overspending".

*Note: I am not considering this as an option, just was stating my opinion

Flieger

 

[indiajust]

I have always viewed reverse mortgages as a great solution for an asset allocation that has too much property net worth, and not enough assets that are more easily liquidated. Plus it has an aspect of insurance that some might find appealing, since you can't be evicted during your lifetime. In this regard reverse mortgages behave like an annuity or a pension. You exchange an asset for a promise till death plus cash.

New England can be a bit deranged with property ownership having cult like characteristics. You see folks living in decrepit shacks in third world conditions, refusing to sell under any circumstances... yet they could live a generous lifestyle with a lower COL place and conversion to cash.

If you want to age in place and never be concerned about eviction, it can be a great solution.

 

[rodi]

My sister chose to do a reverse mortgage. She's a retired teacher with a pension. Her pension and reduced SS more than cover her day to day spending. However a divorce left her with less cash, but a paid off house. She wanted to do some big ticket updating of the house... She looked at Heloc but opted for a smallish reverse mortgage. Her equity is still well over 50% after the reverse mortgage. She doesn't have children and her nieces and nephews will still get plenty of equity when she passes.

It was not the choice I would have made but it totally made sense for her.

 

[Midpack]

I think the general consensus is to avoid them if possible and only use as a last resort for various reasons.

Why else would anyone pursue a reverse mortgage if not as a last resort? Does anyone build a retirement plan that relies on a reverse mortgage? No one I've ever heard about. Resorting to a reverse mortgage would suggest the original plan has fallen short IMO.

Taking on a reverse mortgage to enhance QoL sounds like a slippery slope to me, so it will be the last avenue I would consider.

 

[Dtail]

Why else would anyone pursue a reverse mortgage if not as a last resort. Does anyone build a retirement plan that relies on a reverse mortgage? No one I've ever heard about. Resorting to a reverse mortgage would suggest the original plan has fallen short IMO.

Taking on a reverse mortgage to enhance QoL sounds like a slippery slope to me, so it will be the last avenue I would consider.

+1

 

[Koolau]

Why else would anyone pursue a reverse mortgage if not as a last resort? Does anyone build a retirement plan that relies on a reverse mortgage? No one I've ever heard about. Resorting to a reverse mortgage would suggest the original plan has fallen short IMO.

Taking on a reverse mortgage to enhance QoL sounds like a slippery slope to me, so it will be the last avenue I would consider.

Yeah, I'd think of a RM as a backup to my other backups. IOW a desperation move, but YMMV.

 

[RetiredHappy]

I used a RM calculator recently and was very surprised as to how little that they actually pay. In another thread I mentioned that our friends "are spending too much" and will run out of money in 7 to 10 years' time.

They own a home that can sell for about $1.85 M today and will likely go for $2M even in a couple of years' time becuase the prices in their development have gone crazy. They paid $1.15M back in 2021. Anyway, I fed the data, $2M value on their home, $280K mortgage (in 7 years' time), and their ages (77/75). The calculator showed that they would only be given about $260K to $360K using reverse mortgage.

Based on this situation, if they were to sell their house in 7 years' time, after agent fees and repayment of mortgage, they would net about $1.65M. They would be better off buying another home for about $900K and get $750K out instead of getting a reverse mortgage on their home. If I were to be in their shoes, I would take out a SPIA on the $750K since they are terrible in managing their expenses. Having a monthly fixed income payment will ensure that they don't run out of money shortly after netting the $750K. Hopefully that they will sell their home before they totally drain their savings. Having even a lump sum of $200K or so as their reserves would be good, although it means that they may also blow through that quickly.

 

[Koolau]

I used a RM calculator recently and was very surprised as to how little that they actually pay. In another thread I mentioned that our friends "are spending too much" and will run out of money in 7 to 10 years' time.

They own a home that can sell for about $1.85 M today and will likely go for $2M even in a couple of years' time becuase the prices in their development have gone crazy. They paid $1.15M back in 2021. Anyway, I fed the data, $2M value on their home, $280K mortgage (in 7 years' time), and their ages (77/75). The calculator showed that they would only be given about $260K to $360K using reverse mortgage.

Based on this situation, if they were to sell their house in 7 years' time, after agent fees and repayment of mortgage, they would net about $1.65M. They would be better off buying another home for about $900K and get $750K out instead of getting a reverse mortgage on their home. If I were to be in their shoes, I would take out a SPIA on the $750K since they are terrible in managing their expenses. Having a monthly fixed income payment will ensure that they don't run out of money shortly after netting the $750K. Hopefully that they will sell their home before they totally drain their savings. Having even a lump sum of $200K or so as their reserves would be good, although it means that they may also blow through that quickly.

Yeah, in a situation like this (and at their ages) I'd be looking for a nice condo and dump the house. Could possibly end up with a $Mil to add to the stash.

 

[RetiredHappy]

Yeah, in a situation like this (and at their ages) I'd be looking for a nice condo and dump the house. Could possibly end up with a $Mil to add to the stash.

Their problem is that they like to live "flashy" and unlikely to want to live in a condo or even anywhere under $1M. They are two people who bump along in life in almost every aspect. We buy $24 per dozen of golf balls, and I look for discounts and sometimes they go as low as $20 and I buy in bulk. He has to play with $43 per dozen. He loses a ton of balls because he is not very good. The expensive golf balls don't help his game. We went on our monthly long trip and I lost 3 balls. He went through a box and needed to buy more. Anyway, I am digressing.

 

[Koolau]

Their problem is that they like to live "flashy" and unlikely to want to live in a condo or even anywhere under $1M. They are two people who bump along in life in almost every aspect. We buy $24 per dozen of golf balls, and I look for discounts and sometimes they go as low as $20 and I buy in bulk. He has to play with $43 per dozen. He loses a ton of balls because he is not very good. The expensive golf balls don't help his game. We went on our monthly long trip and I lost 3 balls. He went through a box and needed to buy more. Anyway, I am digressing.

Maybe digressing, but you've explained a lot. My take is no matter what they do, they will always struggle because they haven't managed to "grow up" and accept their financial situation. I'm sure its frustrating for you to watch them struggle - knowing they have solutions - if they would just accept their situation and deal with it. You've done your best and they'll just have to figure it out (or not.) You're trying to be a good friend, but apparently they can't accept their own situation. "Flashy" can be deadly to FIRE.

 

[skyking1]

We are not considering our new home a "forever" home. Circumstances change and we will harvest some of our sweat equity down the road and downsize. I'd love to get a good 20 years, and finances cover us regardless.
Downsizing is another way to reap some equity if you happened to be "over homed".

 

[Murf2]

So. I‘ve got a scenario I could use some help with.
Couple isn’t wealthy and they are very responsible with their money.
They plain to age in place and are happy with the home. No payments other than monthly expenses and no children.

They have no LTC and will most likely enter a nursing home at some point. There they will probably spend down their money and then be on Medicaid for the extent of their stay.

Would it make sense for them to get what equity they can from the house while they are able to use it? It seems any money / equity they have will end up with the state at some point.

Or would trying to get them to sell and rent cheaply still make more sense? Their assets are around 800k in retirement savings, home value is probably 350k and they would receive 3500 SS when he files. They could live on what they have with no frills.

I guess one of them is concerned about “leaving money on the table”.

I’m not sure how to advise him.

Thanks!

 

[Joseph]

Unless we are broke, I am not a fan of reverse mortgages. Like a lot on this board, it is a LTC worse case scenario. Plan on having a small LTC policy ( either hybrid life ins or 1-2 coverage with long elimination period) to cover less than 50% of LTC and self fund the rest ( up to around 1/2 million). If either wife or I go over that, use the has.

 

[pb4uski]

Yeah, I'd think of a RM as a backup to my other backups. IOW a desperation move, but YMMV.

+4 or whatever it is. A reverse mortgage is Plan Z... the very last thing that we would do only if we have no other choice.

 

[Joseph]

Also not the intent to leave daughter a house that might be worth 2.5 million or more in 30 yrs with zero mortgage. She will get a chunk, probably a majority. But some of that equity will be a blow that dough scenario. So I could see a HELOC for few hundred thousand for LtC , car etc