Reverse Mortgages: An Important Financial Strategy for Seniors
Is this good news or bad news?
Doctor to patient: “You’re in great health. You should last another 25 years”
Patient “Well, that’s great news!”
Doctor: “Not if you don’t have enough retirement savings.”
This joke reflects reality: many Americans’ retirement savings and incomes are simply not keeping pace with inflation and our increasing life expectancy. Fortunately, there is an option that Jack Guttentag, professor emeritus at the Wharton School of Finance, calls “one of the best engineered financial tools of our generation”.
In the early 1980’s, the U.S. Senate Special Commission on Aging advised FHA to fashion a program that would allow seniors to tap into their home equity. In the mid-1980s, FHA began working on what has come to be known as Home Equity Conversion Mortgages (HECM) — more commonly called reverse mortgages – which President Reagan signed into law in 1988.
As awareness of reverse mortgages has grown, so has their popularity. Like many, Professor Guttentag was at first skeptical of reverse mortgages. But, as the program has become more widely implemented, its financial soundness is proving itself. It is increasingly being used to extend the financial independence of senior homeowners, which is one reason Guttentag praises it.
Originally, the conventional use for a reverse mortgage was to pay off an existing mortgage, thereby freeing up monthly cash flow. This is still the most common use for reverse mortgages. But in recent years, financial advisors have been utilizing a unique aspect of the reverse mortgage – the growing line of credit. Unlike a home equity line, where the line of credit accrues no interest, a reverse mortgage’s line of credit has a very generous, tax-free growth rate. In some cases, advisers are recommending that the line of credit be used to supplement monthly income and thereby extend retirement savings that are in jeopardy of being depleted.
Many seniors do not have a long-term care policy and purchasing them later in life – especially after retirement – may not be financially feasible. Jeanne Smith, of Marca Life Planning, is one of Birmingham’s financial professionals who understand the advantages. Ms. Smith is a registered nurse and a Certified Financial Planner, so she knows how health issues can diminish our financial longevity. “A long-term care policy can be a viable option for many but for those seventy and older, the cost is usually prohibitive” says Ms. Smith. “A reverse mortgage with a growing line of credit is a viable tool to plan for the future cost of care. I’ve used this strategy for clients lacking insurance protection, who have limited savings or who simply want to pass financial assets not their home to heirs.”
For a seventy year-old Alabamian with a $220,000 home, a reverse mortgage today would allow for a line of credit of $121,000. In ten years — regardless of what might happen in the housing market or the stock market – this reverse mortgage borrower would have a line of credit with at least $226,000 (and it could be considerably more if interest rates rise). This is tax-free money, and seniors do not have to use their retirement assets, or any other money, to fund it.
This is just one example of why FHA, Congress, and Ronald Reagan, created the FHA reverse mortgage program back in 1988. And it is good that they did, because for many seniors this well “engineered financial tool” will be just what the doctor ordered.
If you would like to explore a reverse mortgage, you are welcome to contact me at the number below. I will be happy to discuss how one might work for your particular situation.
Jim King is a partner in McGowin-King Mortgage, which has been doing reverse mortgages longer than anyone in Alabama. McGowin-King is Alabama owned and operated and has six reverse mortgage specialists dedicated to serving seniors throughout Alabama. McGowin-King has an A+ Rating with the Better Business Bureau and is a member of the Alabama Mortgage Brokers Association. Mr. King is a life-long resident of Birmingham and a senior home-owner. You may contact him or a member of his staff at (205) 879-7776.