Reverse mortgages, once viewed as loans of last resort, are slowly gaining some mainstream respect.
Due to both strengthened consumer protections for these loans and an aging population that is largely unprepared to deal with the reality of retirement expenses, financial advisors are becoming more comfortable with recommending reverse mortgages to some clients.
A reverse mortgage "can be a powerful tool because it can give you additional access to wealth," said Rita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth. "But make sure you don't rush into anything, and make sure you know how it would fit into your financial plan."
In simple terms, a reverse mortgage is a loan that lets you convert a portion of the equity in your home into cash if you are age 62 or older. But unlike traditional mortgages, you have no monthly obligation to the lender. Instead, you receive the loan either through monthly payments made to you, a line of credit, a lump sum or a combination of these options.
Most reverse mortgages are done — and insured — through the Federal Housing Administration. They come with stipulations, including a requirement that the borrower has the means to pay real estate taxes, hazard and/or flood insurance, utilities and home-maintenance costs. Assuming those conditions are met, the loan must be paid only when the borrower sells the house, no longer lives there or passes away.
One aspect of reverse mortgages that make some financial planners see their value as part of a full financial plan is the fact that the available balance grows over time.
It's a bit complicated, but the idea is that whether you actually tap the loan or not, finance charges accrue to the loan.
So say you are 62 and secure a reverse mortgage worth $100,000 even though you don't need the cash immediately. If you do not touch the money for another 10 or 15 years, the years of accrued finance charges means the total balance of the loan — and therefore the amount available to you — becomes greater.
"For a lot of people … they could be looking at a 30-year retirement," said Tom Davison, a CFP and special projects coordinator at Summit Financial Strategies. "So 20 years from now that $100,000 could be $400,000. The balance can grow to quite large amounts, and at any point along the way, you can use it," he added.
Liz Revenko, a CFP and senior financial planner with Mosaic Financial Partners, recently helped an elderly client secure a reverse mortgage so she could stay in her house longer than she would have been able to otherwise.
"She didn't want to move out or downsize; she just wants to be home," Revenko explained. "This buys her extra years in her home."
The client, who requires medical care around the clock, had been relying on her investment portfolio to fund her health-care expenses.
Because of the high value of the client's home and her low mortgage balance, she was able to get a reverse mortgage of more than $300,000. The loan is reducing the extent to which she has to rely on her investments to fund her medical expenses.
While details of the client's exact situation were undisclosed, the cost of in-home health care can run thousands of dollars a month.
Davison said a reverse mortgage can help your investment portfolio work better.
The reason, he explained, is if you take monthly payments from the loan and reduce what you take from your investment portfolio, you lower the chance that you'll be forced to sell investments when the market is down.
"Your investment portfolio will work better if you can cut down how much you have to rely on it monthly to live," Davison said. "So a reverse mortgage can really help another asset."
The amount available to a borrower for a reverse mortgage depends on several factors, including age, value of the home and equity in the home. The older you are, the greater the amount available to you.
New federal regulations are intended to help borrowers from falling into default of the loan's provisions.
In contrast to the past, when reverse mortgages were given to borrowers based solely on the equity in their home, applicants now must undergo a financial assessment. This basically takes a look at your credit history and other sources of cash to make sure you can meet the provisions of the law.
U.S. Census Bureau data shows that more than 25 million homeowners are age 62 or older. Yet according to the National Reverse Mortgage Lenders Association, the number of senior households currently using a reverse mortgage stands at about 620,000.
But exploring the use of a reverse mortgage cautiously is not a bad thing. Financial experts emphasize that it should be viewed in relation to the rest of your financial plan.
"For underfunded people [who are barely making ends meet], it might be their last resort," Davison said. "But for most retirees, it is only one part of their financial picture."
― By Sarah O'Brien, special to CNBC.com
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