For many of our clients, the family home is their largest single asset. This has not changed, even after the housing bubble burst nearly four years ago. I will allow my older clients to consider a reverse mortgage, but only when it is clearly needed (based on advice from their financial planner), and only when the client has been referred to a reputable reverse mortgage broker.
It is increasingly important for our older clients to plan for the family home carefully. Boston College’s Center for Retirement Research recently reported that greater than 60 percent of households are “at risk” of being financially unprepared for retirement. In other words, they will be unable to maintain their pre-retirement standard of living. Saving your home equity for your heirs may be a goal that fewer baby boomers will be able to afford. Social Security benefits will likely not keep up. IRAs and 401k balances have been hit hard by the recession. Traditional pensions are smaller and are increasingly at risk.
A reverse mortgage is only available to clients who are at least 62 years old. It allows access to a portion of the equity in the home. No repayment of principal or interest is required while the client is still living in the home. However, interest is added to the loan and must be paid when the house is sold or when the clients move out of the home.
For reverse mortgages that are insured by the US Government, the homeowner (and their heirs) can owe no more than the value of the property at time of sale (assuming there is an “arms-length” transaction). This is a very important protection, particularly in the Bay Area housing market, which will likely remain uncertain for several more years. It is also important that clients retain title to their home and do not share any appreciation in the home value with the lender. The amount of cash that a client can receive in the transactions varies according to four different factors. The most important factor is the age of the client. The older our client is, the more loan proceeds that he or she can receive.
The cash from a reverse mortgage can be used for any reason, but it is the role of the attorney and the financial planner to help the client use the cash wisely. For example, reverse mortgages have typically been used to pay off existing mortgages and high-interest loans, in order to increase the client’s monthly cash flow. They have also been used to fund in-home companions and medical care, or to pay for home improvements so that the client can safely “age in place.” Beginning two years ago, a reverse mortgage could be used for a home purchase. This allows clients to downsize to a smaller home without generating large amounts of unnecessary cash. Under some circumstances, it could make sense to use the reverse mortgage to purchase long term care insurance or life insurance. For younger retirees, a reverse mortgage could be used to delay the need for security payments, because these payments would be larger when the client waits until he or she is older before making a claim.
Since 2007, only reverse mortgages insured by the government are available. These are called Home Equity Conversion Mortgages (HECM). Government insurance makes the closing costs high, but this insurance provides protection for both the client and the lender.
Not everyone will qualify for a reverse mortgage. However, it is a financial tool that, I believe, will have an increasingly important role in estate planning over the next 20 years.