SAYING NO MIGHT BE THE BEST OPTION
I do not believe a reverse mortgage is always the best option. There are retirees for whom a reverse mortgage does not make sense.
Here are four categories of clients who should be steered away from the program.
Clients who are definitely moving in the near future
Reverse mortgages were developed to help retirees age in place, and while no one can predict the future, it is helpful to at least be planning on staying. Unforeseen health issues or other factors may necessitate your clients moving before they planned to, but the program is optimized when clients remain in the home for the majority of their retirement.
On the other hand, a specialized reverse mortgage program may be a helpful solution for those who plan to move. In 2008, as part of the Housing and Economic Recovery Act (HERA), HUD authorized the HECM for Purchase (H4P). This reverse mortgage allows retirees to purchase a new home with a 50-60% down payment and use the HECM to finance the remainder of the purchase price.
Clients who don’t have a need (or strategy) for the reverse mortgage funds
The newly restructured reverse mortgage is designed to help mass affluent retirees increase cash flow, reduce retirement risks, preserve accumulated assets, improve access to capital (liquidity), and add new dollars back into their savings (with the HECM for Purchase). However, not all retirees will need these things; some are already confident in their retirement security/stability and don’t need to augment their income plan.
Clients who would financially struggle to maintain their homes
(even after getting a reverse mortgage)
A reverse mortgage carries four basic responsibilities for the recipients. (1) At least one borrower must live in the home as their principal residence, (2) they must maintain the property, (3) they must pay all property related expenses (taxes, HOA fees, etc.) and (4) they must keep homeowners insurance in force.
For most, these obligations are not onerous. For others, the they can present a hardship, especially for clients with very limited, fixed income. If it may be difficult for the clients to maintain their property taxes and living expenses even after getting a reverse mortgage, then the program would not be a suitable option for them. The truth is that they may become delinquent in their taxes–setting off a series of unfavorable actions initiated by the local municipality.
Clients for whom a better option is available
The reverse mortgage option must be weighed against other viable alternatives to discover which better solves a problem, insures a risk or fulfills a prudent desire. Here are the top eight alternatives I have found over the last 20 years.
- Sell and Move: This is always my first suggested consideration because it is often the most effective alternative for a successful retirement.
- Cash in Other Resources: Sometimes clients have savings, investments, or permanent life insurance from which they’re willing to draw, or they may consider selling or borrowing on a second home to solve the financial challenge. You must weigh the benefits of using all or some of these other resources to meet the need.
- Borrow Money from Family: I have found that most children are willing to help their parents, but often are not prepared to provide the amount of money their parents may need for an extended retirement. Furthermore, my clients have been uncomfortable asking their children for this type of help. Would you be comfortable having your children assist you with your retirement income needs?
- Refinance: Consider taking out a home equity loan and making payments or refinancing an existing one into a lower payment. This is a good choice for some, but for others, it does not solve the cash flow or savings-erosion problems. The difficulties may be lessened, but the ultimate problem may still persist.
- Find a Roommate: Renting out a spare room or finding a senior roommate can often be a good solution. It provides income and companionship when it works well.
- Research Local Programs: Some retirees may be eligible for local programs that provide essentials. Cash and food assistance, along with home repair or weatherization, are often available to clients who meet the income requirements.
- Go Back to Work: Retirees have mixed reactions to this. Some say they’d like to, but no one will hire them. Others say, “Not on your life.” Most are somewhere in between. Regardless of their reaction, part-time work is often a great retirement income supplement.
- Do Nothing/Wait: Sometimes waiting or doing nothing is the most appropriate thing to do. My experience has taught me that in most cases, by the time the HECM conversation comes up, the situation has worsened. I will often ask, “If you don’t make some changes, do you think things will get better or worse?”
Here’s the point. Reverse mortgages, for the right client and when incorporated with other assets, can provide tremendous enhancement to a retirement income plan.