2880: Bumpy Road in Retirement? Learn How a Reverse Mortgage Can Be Your Spare Tire by Steve Chen of New Retirement

[00:00:00] [SPEAKER_00]: This is Optimal Finance Daily. Bumpy Road in Retirement? Learn How a Reverse Mortgage

[00:00:07] [SPEAKER_00]: Can Be Your Spare Tire by Steve Chen of New Retirement.com. And I'm your host and personal

[00:00:14] [SPEAKER_00]: finance enthusiast, Diana Merriam. Welcome back to Optimal Finance Daily, where I'm

[00:00:20] [SPEAKER_00]: here with you each and every day to read from some of the world's best finance blogs.

[00:00:25] [SPEAKER_00]: So with that, let's get right to today's article as we optimize your life. Bumpy Road in Retirement?

[00:00:37] [SPEAKER_00]: Learn How a Reverse Mortgage Can Be Your Spare Tire by Steve Chen of New Retirement.com.

[00:00:44] [SPEAKER_00]: The road to retirement can have all sorts of twists, turns and probably some potholes.

[00:00:51] [SPEAKER_00]: If you're not prepared, these bumps have the potential to derail your financial security.

[00:00:57] [SPEAKER_00]: However, you can have a contingency plan for when the path gets rocky.

[00:01:02] [SPEAKER_00]: Just like you carry a spare tire in your car for when you get a flat, you might want to consider

[00:01:08] [SPEAKER_00]: a reverse mortgage as a way to keep your lifestyle rolling if something happens financially during

[00:01:13] [SPEAKER_00]: your golden years. There's been a growing acceptance among financial planners lately

[00:01:19] [SPEAKER_00]: for using home equity, particularly through the use of a reverse mortgage, as a backup plan.

[00:01:26] [SPEAKER_00]: In the event of a stock market downturn, a health emergency or any personal hardship,

[00:01:33] [SPEAKER_00]: funds from a reverse mortgage can provide you with another source of wealth,

[00:01:38] [SPEAKER_00]: enabling you to maintain your lifestyle during retirement. Home is where the wealth is.

[00:01:45] [SPEAKER_00]: For many retirees, their home is a valuable source of net worth. The average married couple entering

[00:01:52] [SPEAKER_00]: retirement will have roughly $192,000 in home equity, but only $92,000 in non-equity assets,

[00:02:02] [SPEAKER_00]: according to the U.S. Census Bureau. In a report titled The Reality of the Retirement Crisis,

[00:02:09] [SPEAKER_00]: the Center for American Progress stated, quote,

[00:02:14] [SPEAKER_00]: If households are assumed to draw on that equity in retirement via tools such as a reverse mortgage,

[00:02:20] [SPEAKER_00]: it will make them appear to have far more assets available than otherwise.

[00:02:26] [SPEAKER_00]: End quote. However, if households don't liquidate the entirety of their assets,

[00:02:32] [SPEAKER_00]: including home equity, the Center finds that the share of households considered at risk of

[00:02:37] [SPEAKER_00]: not having enough money to maintain their standard of living in retirement will rise.

[00:02:43] [SPEAKER_00]: Converting Home Equity into Cash Flow. To get access to your home equity,

[00:02:49] [SPEAKER_00]: you could sell your home and move into a less expensive residence. However, if you want to stay

[00:02:55] [SPEAKER_00]: in your existing home, a reverse mortgage is an interesting option that's growing in popularity.

[00:03:01] [SPEAKER_00]: A reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity

[00:03:08] [SPEAKER_00]: into funds that they may use at their own discretion. Homeowners essentially borrow

[00:03:14] [SPEAKER_00]: against their home equity in return for loan advances, which are not subject to state or

[00:03:20] [SPEAKER_00]: federal income tax. Unlike a conventional mortgage, like the one you use to purchase your home,

[00:03:27] [SPEAKER_00]: a reverse mortgage does not require a monthly payment. But similar to a regular mortgage,

[00:03:34] [SPEAKER_00]: reverse mortgage borrowers must continue to pay property taxes and homeowners insurance.

[00:03:40] [SPEAKER_00]: The most common reverse mortgages found on the market today are loan products insured by the

[00:03:45] [SPEAKER_00]: Federal Housing Administration called Home Equity Conversion Mortgages, or HECMs. To be eligible

[00:03:54] [SPEAKER_00]: for an HECM, you must be at least 62, have sufficient equity in your home, own your home

[00:04:01] [SPEAKER_00]: outright, or have a mortgage balance that can be paid down using the loan proceeds from the

[00:04:06] [SPEAKER_00]: mortgage. Loan applicants will also be assessed on whether they have the financial capacity to

[00:04:13] [SPEAKER_00]: maintain ongoing loan terms, including the timely payment of property taxes and insurance.

[00:04:20] [SPEAKER_00]: HECM borrowers may choose to receive loan proceeds in several different ways,

[00:04:26] [SPEAKER_00]: including a single lump sum disbursement, monthly term payments for a certain period of months,

[00:04:32] [SPEAKER_00]: or tenure payments for as long as they continue living in their home.

[00:04:37] [SPEAKER_00]: Another option, the reverse mortgage line of credit, is becoming increasingly popular in

[00:04:43] [SPEAKER_00]: financial planning strategies for its ability to provide retirees with a growing pool of funds

[00:04:49] [SPEAKER_00]: that isn't affected by market volatility. Reverse Mortgage Line of Credit

[00:04:56] [SPEAKER_00]: A HECM line of credit can also be a great resource to help retirees reduce market risk,

[00:05:04] [SPEAKER_00]: especially when it comes to selling stocks at a loss, according to Jamie Hopkins,

[00:05:09] [SPEAKER_00]: a professor of taxation at the American College in Bryn Mawr, Pennsylvania.

[00:05:15] [SPEAKER_00]: In an article for CNBC, Jamie says, quote,

[00:05:19] [SPEAKER_00]: For example, you might be better off meeting your income needs by borrowing from your home

[00:05:24] [SPEAKER_00]: through an HECM line of credit than by selling your stocks when they're down 20%, end quote.

[00:05:32] [SPEAKER_00]: That's because the HECM line of credit has a growth feature, which means that the unused

[00:05:38] [SPEAKER_00]: loan balance grows over time. This isn't the same as earning interest. Rather, the line of credit

[00:05:45] [SPEAKER_00]: growth feature takes into consideration that you're one year older and that your home has

[00:05:51] [SPEAKER_00]: appreciated in value. The HECM line of credit can provide retirees much needed income,

[00:05:59] [SPEAKER_00]: allow them to age in place, help them avoid depleting their savings too quickly,

[00:06:05] [SPEAKER_00]: and increase the longevity of a person's retirement portfolio.

[00:06:10] [SPEAKER_00]: Recent financial planning research has shown that an HECM line of credit, when taken at the start

[00:06:17] [SPEAKER_00]: of retirement and then left to grow, can significantly increase in value.

[00:06:23] [SPEAKER_00]: Reversing the conventional wisdom. Historically, the conventional wisdom has been to use a reverse

[00:06:30] [SPEAKER_00]: mortgage only as a last resort once all other investments have been depleted. As recent

[00:06:36] [SPEAKER_00]: research has found, this is the absolute worst strategy for using home equity. If, however,

[00:06:42] [SPEAKER_00]: a retiree obtained a reverse mortgage at the beginning of retirement and let the line of

[00:06:48] [SPEAKER_00]: credit grow over time, this would give them another bucket of funds to draw upon once they

[00:06:54] [SPEAKER_00]: run out of other savings. Research author Wade Fowle, principal at McLean Asset Management in

[00:07:01] [SPEAKER_00]: McLean, Virginia, writes, quote, the strategy which uses home equity as a last resort,

[00:07:07] [SPEAKER_00]: but which opens a line of credit at the start of retirement in order to let the line of

[00:07:13] [SPEAKER_00]: credit grow before being tapped, provides the highest increase in success rates, end quote.

[00:07:19] [SPEAKER_00]: More than 90% of reverse mortgage borrowers establish this standby line of credit strategy

[00:07:26] [SPEAKER_00]: that they only access when funds are needed, according to the National Reverse Mortgage

[00:07:31] [SPEAKER_00]: Lenders Association, an industry group that provides a variety of reverse mortgage resources

[00:07:37] [SPEAKER_00]: for consumers on its website. Does your retirement need a spare tire as a backup?

[00:07:45] [SPEAKER_00]: When driving, you carry a spare tire in case you get a flat. When retired, should you have

[00:07:51] [SPEAKER_00]: a reverse mortgage in place in case you need the funds? You just listened to the post titled,

[00:08:00] [SPEAKER_00]: Bumpy Road in Retirement? Learn how a reverse mortgage can be your spare tire,

[00:08:06] [SPEAKER_00]: by Steve Chen of NewRetirement.com, and I'll be right back with my commentary.

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[00:09:13] [SPEAKER_00]: While the idea of a reverse mortgage as a spare tire for retirement may sound appealing,

[00:09:20] [SPEAKER_00]: there are significant risks and downsides that retirees should be aware of.

[00:09:25] [SPEAKER_00]: Firstly, reverse mortgages are not as straightforward as they're often presented.

[00:09:30] [SPEAKER_00]: Although they can provide access to home equity, they come with complex terms, high fees,

[00:09:36] [SPEAKER_00]: and interest rates that can erode the value of your estate over time. This erosion can lead to

[00:09:42] [SPEAKER_00]: little to no inheritance, which is an important consideration for many retirees.

[00:09:49] [SPEAKER_00]: One major issue with reverse mortgages is that they don't eliminate the ongoing financial

[00:09:54] [SPEAKER_00]: responsibilities of home ownership. Borrowers are still required to pay property taxes,

[00:10:00] [SPEAKER_00]: homeowners insurance and maintenance costs. Failure to meet these obligations can result

[00:10:06] [SPEAKER_00]: in foreclosure, which is a devastating outcome, particularly for those who took out a reverse

[00:10:12] [SPEAKER_00]: mortgage with the intention of aging in place. Moreover, relying on a reverse mortgage as a

[00:10:19] [SPEAKER_00]: financial safety net can create a false sense of security. The loan amount is based on the

[00:10:25] [SPEAKER_00]: home's value, which can fluctuate due to market conditions. If the housing market declines,

[00:10:31] [SPEAKER_00]: the available equity may be less than anticipated, leaving retirees with fewer funds than expected.

[00:10:38] [SPEAKER_00]: This can be especially problematic during periods of economic downturn,

[00:10:42] [SPEAKER_00]: when other retirement assets may also be under pressure. The notion that a reverse mortgage

[00:10:48] [SPEAKER_00]: should be established at the start of retirement to allow the line of credit to grow is a strategy

[00:10:53] [SPEAKER_00]: that may benefit lenders more than borrowers. The longer the loan is in place, the more interest

[00:11:00] [SPEAKER_00]: accrues, increasing the total debt and further diminishing the equity left in the home.

[00:11:06] [SPEAKER_00]: While a reverse mortgage might be a viable option for some, it should be approached with caution.

[00:11:12] [SPEAKER_00]: Retirees should thoroughly explore all other options and consult with a financial advisor

[00:11:18] [SPEAKER_00]: who does not have a vested interest in promoting reverse mortgages before committing to such a

[00:11:24] [SPEAKER_00]: significant financial decision. But that'll do it for today. Thank you for being here every

[00:11:30] [SPEAKER_00]: day and listening. Have a great rest of your day, and I'll see you again tomorrow where optimal life awaits.