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Another Perspective on Reverse Mortgages by Karen Elise Kilbride

Oct 11, 2016

You probably never think about the value of your homes as a potential resource for retirement. Conventional wisdom would tell you to preserve the home equity as a last resort option.  If the value of your home did not need to be used it could be left as part of our legacy to the next generation.  Maybe there is another perspective to the conventional way of thinking.

Just like cash and investments, your home is an asset which is part of our personal financial balance sheet. Yes, it provides you with a place to live but it can also be a resource to help meet retirement spending needs.

Setting into place a HUD approved Home Equity Conversion Mortgage (HECM) or reverse mortgage, allows you to access part of the equity in the home, turning an otherwise illiquid asset into a liquid resource.

Under a HECM, there are four ways in which you can access the proceeds from a reverse mortgage, lump sum payout, tenure payments which are similar to monthly annuity payments which are fixed payments guaranteed to be paid as long as the borrower is living in the home, term payments which resemble tenure payments but are taken for a certain number of years instead, and finally the line of credit where the equity value does not need to be spent today or ever but is available for use.  You may also combine several of these options and opt for a modified tenure or modified term payment and also take a line of credit on a portion of the available credit.

Why might you want to set a HECM into place today? If you plan on staying in your home for retirement, a HECM reverse mortgage can be used in a number of ways as part of your retirement plan.

  1. You can pay off an existing mortgage with a HECM which reduces your total retirement cost of living. The HECM can also increase available retirement income streams through a tenure payment or term payment allowing for more flexibility with your total cost of living.


  1. The HECM can help to fund ongoing home improvements for those who wish to remain in their homes as they age.


  1. Drawing upon the HECM as a tenure payment can help to reduce longevity risk with more of your retirement cost of living needs met through increased fixed or guaranteed income payments as long as you live in your home.


  1. Using a HECM may enable a reduction in investment portfolio spending through supplementation of HECM payments to help meet cost of living needs.


  1. The equity of the home could be used as a bridge resource to Social Security benefits enabling a higher benefit from Social Security for the long term.


  1. A HECM tenure payment or term payment can serve as an annuity alternative allowing more of your portfolio to remain in your control and invested rather than permanently transferring part of your wealth to an insurance company in exchange for annuity income payments.


  1. A contingency reserve for liquidity needs and unexpected cost shocks.  A HECM line of credit creates a funding source for unexpected cost shocks and provides a liquid resource which can help support retirement cost of living needs after portfolio depletion.


  1. The HECM could be used in a coordinated way with the investment portfolio spending plan to mitigate sequence of returns risk by reducing portfolio spending amounts in years when you are at risk of locking in losses on the portfolio to meet spending needs by instead drawing from the HECM.

Meeting retirement cost of living needs requires spending assets somewhere from the retirees’ balance sheet. The home is one of those assets.  Drawing from a HECM is not debt accumulation but instead spending from an asset. Setting into place a HECM turns an illiquid asset into a liquid one creating additional flexibility with retirement spending needs.

Not all retirees should take a reverse mortgage but those who wish to remain in their homes for as long as possible should view this asset as more than an asset of last resort given the possibilities and increased flexibility it offers with one’s retirement decisions.

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