If you've been sitting at home watching cable news while you
work like just about everyone else in 2020, you've probably heard Tom Selleck
explaining why you should consider a reverse mortgage.
Although there are costs and caveats with reverse mortgages,
it turns out his pitch is especially timely right now. Thanks to historically
low interest rates, reverse mortgages have new appeal for people in or nearing
retirement who need cash but can't afford monthly payments on a loan.
"With retirement, low interest rates usually make
everything worse. They make retirement more expensive," said Wade Pfau, a
professor at the American College of Financial Services. "The reverse
mortgage is the only tool I'm aware of that benefits from low interest
rates."
Applying for a reverse mortgage can also help stabilize your
overall financial portfolio, particularly if some of your other investments are
taking a hit.
The loans have gotten a bad rap over the years in some
circles, but if you're considering applying for a reverse mortgage, here are
some things to know.
What is a reverse mortgage?
Essentially, reverse mortgages operate like a loan. They
allow the consumer to tap into the equity in their house, and carry a balance
without making payments until the term of the loan is over.
"It's a mortgage, but it allows you to make your home
equity a liquid resource that you can use to help you fund your retirement
expenses," Pfau said.
A reverse mortgage can be set up as a line of credit, a lump
sum or a series of monthly payments to the homeowner, which can help people who
need cash on hand without relying on their other investments or savings. It's
targeted at older people because you have to be at least 62 years old to
qualify for a reverse mortgage. You also must have substantial equity in your
home.
Some reverse mortgages are proprietary to the companies that
issue them and others are federally backed by the Department of Housing and
Urban Development.
Is now a good time to consider a reverse mortgage?
It's all about the interest rate, according to Evelyn
Zohlen, a certified financial planner and founder and president of Inspired
Financial in Huntington Beach, California.
"If you need to borrow money right now, happy
days!" she said. Low interest rates mean money can be borrowed cheaply. Those
same low rates can also hurt other investment products.
"The low interest rate environment is a mixed
blessing," she said. Some of her clients are seeing interest rates on
bonds, which are meant to help stabilize their investment portfolios, as low as
2 percent.
"It's not a very happy place to be," Zohlen said.
"At that interest rate, you may not even be keeping up with
inflation."
That means reverse mortgages can be uniquely positioned to
help people balance their portfolios at a time when other investments may be
underperforming. Also, reverse mortgage holders only get charged interest when
they draw funds out of the loan, so setting one up means money will be
available without having to incur ongoing interest charges.
John Holmgren, a branch manager for Finance of America
Mortgage in Oakland, California, said that reverse mortgage interest rates tend
to mirror traditional rates pretty closely. Right now, he said, his firm is
offering a product with a rate of 2.99 percent. But, rates go up if you need to
apply for a jumbo loan, which is valued above $765,600.
Who should apply for a reverse mortgage?
For a long time, reverse mortgages have been considered a
financial tool of last resort - something people turn to only when they've
exhausted other options and need cash urgently. The fees involved in reverse
mortgages have been and remain substantial. But, both Pfau and Zohlen said now
is a good time for any retiree who needs more liquidity to look at a reverse
mortgage, even if they have other assets on hand.
"A reverse mortgage is an important tool for a client
to consider if they are concerned that they will have to tap into an investment
portfolio at a time when the market is on a downturn," Zohlen said.
"The markets recovered pretty handily since their
downturn in March, but if the markets had really tanked in March and then
continued to bump along at that level," she added, "folks may have
been forced to sell at a time when it would have been really painful."
For retirees who rely on other investments, a reverse
mortgage may ultimately help protect the value of those other assets.
"I always like to write about them as part of a responsible
retirement income plan," Pfau said. "You're building an overall
retirement strategy."
Holmgren said the exact rate on a reverse mortgage is tied
to a number of factors, including the value of the home and the applicant's
age.
He recently closed a deal on a single-family home valued at
$800,000 in Richmond, California. The applicant secured an adjustable reverse
mortgage for $454,510 at a starting interest rate of 2.74 percent.
Holmgren said he usually advises clients to pursue
adjustable-rate reverse mortgages if they don't need the full balance of the
loan immediately.
"The fixed-rate reverse mortgages do not have the same
flexibility that the adjustables do," he said. Fixed rate loans are always
paid out in a lump sum when the deal closes, but adjustable-rate reverse
mortgages have more variable payment options, including a fixed monthly sum and
a line of credit.
Are there any drawbacks to a reverse mortgage?
"It's important to just note that the setup costs can
be substantial, especially since the 2017 rule change where there's that 2
percent mortgage insurance premium," Pfau said.
He added that it's important to be disciplined about how you
spend the funds from your reverse mortgage, too.
"When I do simulations about this, by helping to better
manage the risk for your investments, they're able to grow more, so that more
than covers the cost of the reverse mortgage," he said.
When you use a reverse mortgage to let your investments
grow, you'll still have to pay off the balance of the mortgage at the end of
the loan, but if you play your cards right, the other parts of your portfolio
can possibly grow to grow to more than the debt you owe.
"That's the key piece that tends to get missed. If you
look at the reverse mortgage in isolation, all you see are the costs and the
growing loan balance. It's how that interacts and how that impacts your other
investment balances" that's the key to getting the most out of a reverse
mortgage.
A reverse mortgage doesn't ever have to be repaid as long as
the borrower lives in their home, which is a good part of the appeal. If
there's any equity after the borrower's estate sells the home, that would go to
any heirs.
Reverse mortgage closing costs can be fairly high, but those
expenses can be rolled into the loan itself, so despite the cost, many reverse
mortgage applicants wind up paying nothing upfront.
How do I get a reverse mortgage?
Your best bet is to speak to a HUD-approved financial
counselor to learn about your options and shop for providers.
Bottom line
With interest rates at historical lows, now could be the
right time to consider a reverse mortgage, depending on your financial situation.
"If you've dismissed them out of hand, check them
out," Zohlen said. "You may be looking to integrate a reverse
mortgage as part of your long-term financial plan, and now's the time that you
can take it out at a generationally low interest rate."
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