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Here’s what you need to know about reverse mortgages

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The stock market is volatile, but the housing market is still hot, making reverse mortgages a more attractive tool for older Americans who need cash to retire but want to stay home. increase.

Mortgage conversion mortgage volumes increased 26% in March, according to data from the US Department of Housing and Urban Development, reported by service provider Reverse Market Insight. Although it fell 3.8% in April, the number of loans for the month was well above 6,000, above the average for the past few years.

Reverse mortgages aren’t as economical as they used to be. In 2017, a rule change made by the U.S. Department of Housing and Urban Development, which manages the HECM program, reduced mortgage premiums for loans from 0.5% to 2 with the aim of reducing potential losses for taxpayers. Was raised to%. This increased the initial cost of the reverse mortgage by $ 1,500 per $ 100,000 face value of the mortgage.

However, the reverse mortgage market is good.

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Dr. Wade Pufau, Principal and Advisor of Tysons, Virginia-based McLean Asset Management, said: “House prices have risen significantly and, historically, interest rates are still low,” he said.

Reverse mortgages have gained strong support from financial planning professionals, and advisors like Pfau recommend reverse mortgages as a potentially useful option for post-retirement distribution management.

Home equity accounts for about 66% of the wealth of the average retired American, so if you’re tied to cash, you can’t use it as a potential source of funding, even at higher costs. It makes sense.

“A survey of financial planning experts has consistently shown that reverse mortgages can improve the outcome of post-retirement planning,” said Pfau, who wrote the book about the product. “It helps to have another source of funding outside the investment portfolio that can provide backstops to people.”

Even if you don’t need cash right away, the idea is that you will be able to use a large amount of money in the future by setting a credit line under good conditions through reverse mortgages. No matter what happens to the value of the home, the line of credit will continue to grow at the rate of the reverse mortgage interest rate. In other words, reverse mortgages hedge the risk of falling home prices.

If you have an investment portfolio, you can decide whether to sell your investment or use the credit line when you need cash. It may sound a bit like the timing of the market, but Pfau suggests simple rules to guide the decision.

“If your investment is worth more than when you retire, sell it from your portfolio,” he said. “If not, withdraw from the reverse mortgage credit line.”

Not all advisors are sold on reverse mortgages. Howard Hook, a certified financial planner at EKS Associates Senior Wealth Advisor in Princeton, NJ, talked to only two clients about reverse mortgage options, one eventually getting a loan.

Top strengths and weaknesses of reverse mortgages

Strong Points

  • Interest rates are still relatively low and home prices are so high that borrowers use an average of nearly 60% of their home assets under very good conditions as a credit line with interest on lump sum payments, monthly payments, or withdrawals only. I can do it. ..
  • Reverse mortgages are non-recourse loans. With property tax and maintenance costs, you can stay at home as long as you like, regardless of changes in the housing market or prevailing interest rates, and the conditions remain the same. The loan should be paid when you die or leave the house.
  • Reverse mortgage lines of credit provide flexibility in managing the distribution of retirement benefits. This allows the borrower to make a tax-exempt withdrawal on the credit line instead of selling (and paying taxes) the investment after the market has fallen.

Disadvantages

  • Qualifying for a reverse mortgage is easy, but it costs more than other mortgage and home equity credit lines. If you don’t stay at home for a long time for health or other reasons, the cost seems to be even higher.
  • If you use reverse mortgage returns for suspicious or risky investments, you are prepared for financial ruin. If it’s a last resort for funding, you’re probably living an unsustainable lifestyle. “A better option is to reduce the size of the house and reduce spending,” says EKS Associates Hook.
  • Homeowners still have to pay property taxes, insurance, and home maintenance costs. If you don’t, the lender can seize your property.

“I know a lot of reputable people like reverse mortgages, but I’m still hesitant to advise clients to consider them,” Hook said. “You have to be careful about using your debt to cover your living expenses or to make up for the decline. [stock] market.

“It’s easy money and can foster bad habits.”

Hook believes that reverse mortgages may be appropriate if the borrower needs to repay medical expenses or more expensive mortgages or personal debt and does not want to sell the investment. However, the all-in-cost and risk of reverse mortgages is still high.

“Setting it as a credit line saves money, but it’s still expensive,” says Hook. If you decide to stay at home for a short period of time, the cost seems to be significantly higher.

“Suddenly you may not be able to climb the stairs or you may have dementia,” he said. “Sometimes it’s not up to you to decide to stay home.”

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