Forward on reverse: Retirement finance in the age of HECM: Pick "reverse" brain cellsAtare E. Agbamu, CRMSreverse mortgages, home equity products, finance counselors
Part II of a non-sequential series on how reverse
mortgages are changing retirement finance
Author's note: The series "Retirement Finance in the Age of
HECM" looks at how reverse mortgages (HECMs) are changing our
notion of retirement finance. In retirement finance, we believe the
21st century is the Age of HECM. Reverse mortgages will play a
critical role in the new retirement finance calculus, and we must
understand this vital role to aid intelligent individual and
societal planning.
Retirement finance advisors should consider a refresher in
reverse mortgages. The education which provided their guidance on
real estate finance in retirement now requires review and
revision.
A new course should address questions such as: What are reverse
mortgages? How do they fit into their clients' retirement finance
calculus? What are the nuances among reverse products? What, for
example, are the costs and benefits of using a reverse mortgage to
buy a retirement home versus paying 100 percent cash? On a value
and cost basis, how do reverse mortgages compare with alternative
home equity products?
Based on a client's life planning needs, when is the best time
to begin tapping home equity via reverse mortgages? What is the
value of reverse mortgages' tax-free cash flow in comparison to
other cash flow sources? How do reverse mortgages interact with
public healthcare benefits? How are reverse mortgages redefining
our notion of real estate inheritance? What are the estate planning
implications of reverse mortgage debt?
Addressing these questions could help retirement and finance
counselors better serve their clients. What used to be solid
retirement and finance advice, when real estate and mortgages are
involved, must be re-evaluated as reverse mortgages evolve into
pillars of modern retirement finance planning.
Some big-name finance and investment columnists have been
dishing out housing finance advice as though reverse mortgages do
not exist. The few who accept the importance of reverse mortgages
often miss their meaning for retirement finance.
Our premise in this non-sequential series, which began in
January, is that the presence of reverse mortgages in the mortgage
lending marketplace has altered retirement finance forever. Those
who traffic in retirement finance counsel should bring themselves
up to date before speaking or writing for public consumption.
A recent case that comes to mind involves advice which a
nationally syndicated financial columnist gave to a couple in an
early November 2007 column in a Twin Cities newspaper. Let's look
at the information presented.
On the strength of more than $500,000 in assets, the couple
intends to retire this year to a smaller house in a smaller
community on a budget of $40,000 a year. They plan to spend
$150,000 for a new, smaller home. In the couple's narrative, there
was no indication that they are selling their current house. We
assume that cash from sale of their present, larger home is
included in their $500,000 in assets. Here is the question they
posed to the prominent financial expert:
When we purchase a house in the new community, should we use
part of our investments to purchase a home free of a mortgage, or
would this deplete too much of our assets for providing income
during our retirement?
Before giving his advice, the financial guru rightly asked the
couple to consider whether investing their money (cash price of new
house) will yield them a higher rate of return than the interest
cost on a mortgage.
With mortgage rates averaging 6.5 percent at the time of the
advice, the financial expert counseled the couple in the following
way:
In order for you to get that high [of] a return on
investments, you'll need to take a fair amount of risk—you'll
need a portfolio with a healthy helping of stocks. Remember that in
your pursuit of a high investment return, you can fall short if the
markets have a prolonged slump.
At your station in life, I would guess you do not want to take
great investment risk, so consider paying cash for your house and
not taking out a mortgage. Although this will deplete your assets,
the lost investment income will be more than offset by the lack of
a monthly mortgage payment.
One final point to consider: If your money for the house purchase
would have to come from retirement accounts, then you would need to
pay income tax on the withdrawal. If this is case, that might tip
the scales in favor of taking out a mortgage.
This is good counsel for this couple in a pre-Home Equity
Conversion Mortgage (HECM) era. However, in the age of HECM, its
value is dubious because it omits a reverse mortgage perspective. A
reverse mortgage informed angle could have shown the couple how
they could:
•Use tax-free reverse mortgage cash as downpayment for
their new home;
•Borrow only a portion of their new home's price and not have
a monthly mortgage payment obligation;
•Save on income tax and asset liquidation costs from
withdrawing less than $150,000 from their assets; and
•Increase potential investment income from liquidating less
than $150,000 of retirement assets.
In addition, a reverse mortgage slant could have shown the flip
side of the above benefits and improved the quality of advice for
the couple.
As mortgage professionals, we can add value to our relationships
with financial planners, certified public accountants, elder law
attorneys, geriatric care managers, and other elder-focused
professionals by supplying the often missing informed reverse
mortgage perspective in these situations.
Think reverse. Move forward!
Atare E. Agbamu, CRMS formed ThinkReverse LLC to help
originators address demographic change via reverse mortgages. A
specialist with Credo
Mortgage and a member of the BusinessWeek Market Advisory
Board, Atare is the first to propose reverse mortgages as
risk-management tools for forward originators. Besides marketing,
originating and researching reverse mortgages since 2001, Atare has
authored more than 90 articles and a book on reverse mortgages. He
may be reached by phone at (612) 203-9434 or e-mail
[email protected].
