Reverse mortgages: Opportunities and concerns

Senior couple walking up to house

Advisors have used reverse mortgages in various ways for portfolio management.

Cash management. “I’ve been recommending ‘protective’ reverse mortgages for clients who are over 62 and have no mortgages, or very small mortgages,” said certified financial planner Mark Wilson, president of Mile Wealth Management. “These can provide a line of credit that’s available if ever needed.

Setting one up early makes sense because the credit limit will rise over time; if not set up early, the credit amount will also rise, but not as quickly,” he added.

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Reverse mortgages fundamentally provide access to a solidly growing amount of cash, said Tom Davison, Ph.D., CFP, researcher and member of the Funding Longevity Task Force of the American College.

“One intuitive method is coordinating draws from investment portfolios and reverse mortgages,” he said. “Particularly in the first seven to 10 years of living on a portfolio, avoiding drawing from it in down years can be a big boost to sustaining the portfolio through the rest of your life.”

Long-term care funding. Sally Long, CFP, principal and wealth manager with Modera Wealth Management, said that an HECM could be a way to fund long-term care expenses for clients who may not qualify for long-term care coverage.

“What I find compelling about the HECM for this need is the growth in the line availability along with the feature that doesn’t require payments of advances but the ability to do so exists,” she said.

Reverse mortgage basics

A reverse mortgage, also known as an HECM, for homeowners age 62 or older, must be the only mortgage on the primary home. It can be used to purchase a primary residence. The younger you are, the less you get, because there’s more time for the loan to compound, said John Salter, professor of personal finance at Texas Tech University. For example, if you have a $100,000 line of credit, you are getting the same amount whether you are 62 or 82.

There are three ways to get money from an HECM (as a percentage of the house value and according to your age):
• Line of credit.
• Annuitized regular payments.
• Lump sum.

Using an HECM in this way also eliminates some complex steps with long-term care insurance, such as the initial application, underwriting and final approval for coverage, Long said. It also eliminates the cash flow impact of premium payments and potential premium increases.

Delaying Social Security. Another portfolio strategy is to use funds generated from a reverse mortgage to cover life expenses, and thereby delay filing for Social Security benefits. This approach has, however, come under criticism recently from the Consumer Financial Protection Bureau.

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