Washington Post: “Should you tap into your home equity to fund your retirement?”
It’s perhaps the most important question every older homeowner could be asking. Should you tap into your home equity to fund your retirement? That question is the title of a recent column written by David Mount in the Washington Post. Mount presents a fair and factual representation of reverse mortgages. However, we will also examine his approach as to when one may be appropriate.
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“The strong stock market and a new perspective from the coronavirus pandemic may have you considering home equity as a way to accelerate a move in retirement”, writes Mount. An interesting point and one that leads me to reflect on the present state of both the real estate and equities markets. Much like we rush to buy replacement wiper blades during the first week of the rainy season, homeowners considering a reverse mortgage often wait until it’s too late. In some cases that means they no longer qualify lacking the required proceeds to pay off their mortgage. In other instances, they can no longer make a monthly withdrawal from their investment accounts due to stock market losses. In a nutshell- a proactive strategy will always outperform a reactive one.
Mounts cautions if one is to use their home equity for retirement “it should be done at the right time and for the right reasons”. Mount notes three of the most popular options for tapping into home equity. The first two are to refinance your existing mortgage to lower your payments or taking out a HELOC or home equity line of credit. Each will only improve a homeowner’s cash flow position modestly not to mention the inherent risks with variable rate HELOCs and payment shock after the initial draw period ends. The third option Mount presents is a reverse mortgage.
When should an older homeowner look to their home’s equity? “Overall, using home equity toward retirement works best for those with a high level of equity in their home,” Mount writes. That position makes sense for someone taking out a line of credit or a cash-out refinance but with one caveat: their cash flow must support the new loan. Does that mean seniors with sizable savings should only consider these typical home equity extraction methods? Not necessarily. And that’s where Mr. Mount and I would disagree when he writes, “Reverse mortgages are a viable option for those with limited access to funds and a sizable amount of equity in their home.”
Let’s unpack that statement. Should homeowners with adequate funds steer clear of a reverse mortgage as a rule of thumb? It really depends on their unique situation. Perhaps some moderately affluent homeowners and their advisors not only see the benefit of a reverse mortgage but are using it as part of a larger financial strategy. “As with any big financial decision, you should work with a financial adviser to create a plan and strategize scenarios that will help you stay financially independent into and through retirement.” Now that’s a statement I can agree with.
Read the Washington Post column
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1 Comment
The crux of the reverse mortgage product is that it is a nonrecourse collateral based mortgage that supplies cash flow to borrowers. Not every senior needs or should even consider this product; however, for those senior homeowners who need cash flow or have a specific use for the cash, a reverse mortgage can be a God send. In such cases, seniors should look at a reverse mortgage as an alternative of first choice.
Many in our industry believe that somehow FINRA is endorsing reverse mortgages as an option of first choice BUT such is not the case. As an industry we are so ultra optimistic, we see an organization that no longer refers to reverse mortgages as an option of last resort as somehow endorsing reverse mortgages as options of first choice. Such is not the case. Is it any wonder that the growth in our industry now only comes from those who already have a reverse mortgage.
What our growth is saying to us is that we are regressing when it comes to reaching out to new prospects. We need to get our heads out of the ground and take a dose of reality. Our detractors may not be calling reverse mortgages loans of last resort but that is exactly what they mean.