The economic volatility currently being caused by the COVID-19 coronavirus pandemic has made generating retirement income more difficult, which is why “outside the box” solutions should be on the table for American seniors. One such solution is a reverse mortgage, according to Charles Rawl, certified financial planner and principal at Charles W. Rawl and Associates, in a new column at Kiplinger.
“This is no time to be stuck in ‘conventional wisdom’ paradigms,” Rawl writes. “[T]ools that may have developed a bad reputation in the past, such as reverse mortgages, may deserve a second look. While their history of misuse is well documented, the industry has repositioned itself so that today’s reverse mortgages might be considered an important and sophisticated financial tool for some.”
Intelligently using a reverse mortgage line of credit – particularly the FHA-sponsored Home Equity Conversion Mortgage (HECM) – could help with extending either an individual’s or a couple’s financial health in ways that more typical strategies may not, Rawl writes. One of the best ways it can help accomplish this goal is through the avoidance of sequence of returns risk.
“When the market experiences a downturn early in your retirement, when you’re no longer contributing to your retirement accounts and you’ve begun to take withdrawals, it can be tough to recover from a major loss,” Rawl writes. “An HECM line of credit can be used as a buffer to help protect against adverse portfolio returns, because retirees can carefully coordinate distributions from their portfolio and their HECM line of credit based on their needs and current market conditions.”
Using the HECM line of credit can also help a retiree pay for unexpected expenses that may crop up during periods of volatility, since preventing shortfalls in cash flow can be a major issue, he says.
“An HECM also can protect against the raiding of other retirement resources when those costs come up,” Rawl writes. “Another bonus: An HECM line of credit has a clear-cut advantage over the use of a traditional credit line in that it has a guaranteed growth option (the growth applies to unused funds) and a “non-recourse” feature. Unlike traditional home equity loans or lines of credit, an HECM line of credit can never be prematurely closed and collected.”
Contemplation of a HECM requires a potential borrower to know details of the associated costs, including mortgage insurance premiums, an origination fee and servicing fees. There are also associated third-party charges for things like appraisals and title checks, but in some cases these additional charges can be deducted from the loan’s proceeds which reduces the amount of cash available to the borrower, but also simplifies the process of paying associated fees.
Other risks to consider include the possibility of reducing inheritances for heirs, though this should be taken into account by everyone prior to the loan’s origination, Rawl writes.
“I’m always dumbfounded when grown children — who often helped set up their parents’ HECM in the first place — seem surprised when this happens,” he says. “When the borrower dies, the home is sold and the proceeds are used to repay the loan, so it’s important that you consider your legacy wishes when deciding if an HECM is right for you.”
Read the column at Kiplinger.
