While the refrain that reverse mortgages aren’t just last resorts for cash-strapped older homeowners may be canonical within the industry, many higher-income retirees may not be familiar with the Home Equity Conversion Mortgage and its potential uses.
Writing on his retirement-planning blog, financial planner and HECM advocate Tom Davison provides an all-in-one resource for explaining the product to more affluent potential borrowers.
“Reverse mortgages have evolved over the years, including significant improvements after 2008’s housing crisis, resulting in enhanced consumer protections, refined federal oversight, reduced costs, and better balance amount the interests of clients, lenders, and the Federal Housing Administration’s insurance backing,” Davison writes by way of introduction.
Davison’s post features a handy table that shows the “highest and best use” of the product for a variety of potential scenarios. For instance, a homeowner looking to buy a vacation home would be best off with a lump sum HECM, Davison writes, while those seeking a safety net for health care emergencies or down markets would be best off with a HECM line of credit. But for higher-income individuals, Davison — based on his experience managing investment portfolios between about $500,000 to $4 million — lays out two “most common” uses of a HECM: improving an existing retirement plan to facilitate increased spending, or adding a rainy-day safety net to an already robust portfolio.
Perhaps the most valuable passage in Davison’s extensive post concerns the HECM line of credit option and its growth over time.
“A line of credit is the most flexible way to access cash and takes advantage of a unique and powerful feature: the borrowing limit grows every month,” Davison writes, adding that the fact the limit can’t be reduced or cancelled — as long as the borrower maintains his or her tax and insurance obligations — represents a major benefit over a traditional home equity line of credit.
Using a graph to illustrate his point, Davison gives the example of a hypothetical $300,000 home, plotting the home-value appreciation against the compounding growth in the line of credit.
“The obvious result is more cash is available later — and in an amount that’s likely to grow substantially more than inflation,” Davison writes. “It may grow faster than most fixed income investments, especially those with guarantees like the FHA backing.”
Davison also points out research showing that using the reverse mortgage line of credit can increase a borrower’s entire estate size, calculated as the investment portfolio plus “housing wealth” minus the loan balance.
“Perhaps the rule of thumb is: when spending is pushed to the max, estate sizes suffer, but when housing wealth is used judiciously, both sustainable spending and estate size can improve,” Davison writes.
Read Davison’s full piece at his blog, ToolsForRetirementPlanning.com.