Reverse mortgages should be first resort for advisers

Reverse mortgages should be first resort for advisers

Investment News, January 16th, 2010

Twenty-two years after they were introduced by the Department of Housing and Urban Development, reverse mortgages still aren't being used by most financial advisers as the viable retirement income vehicles that they can be.

Shunned as being too expensive, confusing and misleading to older homeowners, the reverse mortgage typically is considered a “last resort” by advisers.

But because they allow people 62 and older to stay in their homes and convert home equity into tax-free income, reverse mortgages probably should be an adviser's first resort. In fact, there are many times when a reverse mortgage can be the best way to stretch a retirement portfolio.

Consider, for example, a 75-year-old who is living in a mortgage-free home valued at $350,000 and has a $200,000 retirement portfolio.

Assuming a desired after-tax annual income of $27,500, a 6.5% annual retirement account investment return and a 2% annual home value appreciation, turning to a reverse mortgage first would generate total income of $590,000 and fund retirement for 19 years. Applying the same criteria to a last-resort strategy, which uses a reverse mortgage only after the retirement portfolio is spent, would fund retirement for 16 years with a total income of $500,000.

The $90,000 difference is created primarily by giving the higher-performing retirement portfolio more time to benefit from market appreciation. A third option, drawing down the retirement account, then selling the home but having to finance other living arrangements, would fund retirement for 16 years with a total income of $475,000.

The analysis was compiled with the help of Generation mortgage Co., which clearly has a dog in this fight as the nation's largest independent originator of reverse mortgages.

But that doesn't make the results any less significant for a financial planning industry that is notorious for disregarding home equity as part of an overall financial plan.

Clearly, the reverse mortgage has its share of warts that will turn off many advisers. One of the biggest issues is the cost, even though all fees are deferred until the sale of the home, the death of the borrower or when the borrower moves out permanently.

In the scenario described above, a $6,000 loan origination fee, $2,000 in closing costs, a one-time 2% mortgage insurance premium, a continuing 1.25% mortgage insurance premium and 5.75% in interest on the loan would all be deducted.

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About Reverse Mortgages:  Long thought of as a loan of last resort, reverse mortgages are becoming more popular for people who are simply looking to maximize their financial return.  Consider the options today at NewRetirement.com