Financial Advisors View Changing Slowly about Reverse Mortgages being a longevity tool.
Reverse Mortgages Seen By Advisors As Option Of Last Resort
Time was, reverse mortgages were anathema to financial advisors. One big reason was self-serving: Since the loans provide an income stream, they meant less client money for advisors to manage—and from which to collect fees. In recent years, however, more advisors and planners have warmed to the product, although some still recommend them only as a last resort.
“Gone are the days of the big, bad reverse mortgage, but like anything, once the bad taste exists sometimes it’s hard to move past your first understanding,” said Brett Gottlieb, founder of Comprehensive Advisor in Carlsbad, Calif. “So we take an education approach to all planning. We teach the client about them even if they don’t have a need, so they understand the possibility if it is ever needed in the future.”
One of the most obvious needs is income. “If a client has limited income in retirement—maybe just Social Security and a small investment portfolio—but they own their primary residence free and clear and have no intention of moving, using a reverse mortgage could be significant to meeting their income shortfall,” he said.
Reverse mortgages, which allow homeowners to take out a loan against their home equity without having to make monthly mortgage payments, also have some tax advantages, advisors said. “If the bulk of the individual’s retirement savings is held in an IRA, withdrawing assets before age 70½ will result in a sizeable tax burden,” noted Lauren Klein, owner of Klein Financial Advisors in Newport Beach, Calif. “A reverse mortgage is a highly tax-efficient way to supplement retirement income and manage cash flow. Because the money is a line of credit based on the value of the home, there are no taxes to pay. It can also provide the funds needed to delay Social Security until age 70. Plus, with an available line of credit, clients are less likely to be forced to sell stocks from their portfolio for additional cash during a down market.”
Another area where several financial advisors believe reverse mortgages can play a role is in financing in-home health care or long-term care insurance.
“Especially in these times, people may have to plan on how to pay for their own long-term care,” said Jeffrey A. Asher, an attorney in New York City. “People may not be able to rely on their finances or the government. They may have to do what they can to pay for their long-term care. A reverse mortgage can help.”
But David Zavarelli, an advisor in Danbury, Conn., said he “can’t stress enough” that a reverse mortgage is only appropriate if the client intends to stay in their home for as long as they live.
“I know one homeowner whose reverse mortgage really helped them enjoy their retirement more than they otherwise would have,” he said. “However, circumstances changed when his wife passed away. Now he would prefer to relocate to be closer to other family members, but in doing so he would have to pay rent of around $1,200 per month, whereas he currently only has to pay around $350 per month for taxes and insurance. Because he took the reverse mortgage when real estate values were higher, there wouldn’t be any equity if he sold. So, he feels somewhat captive now.”
That’s why lots of advisors still see reverse mortgages as risky propositions.
“In the hierarchy of funding sources for a client, a reverse mortgage ranks towards the bottom, just above taking a premature IRA or 401(k) distribution and paying the taxes and penalties,” said Joseph Conroy, a CFP at Synergy Financial Group in Towson, Md. “It is expensive, it takes away from future options and flexibility and should really only be considered as a last resort type of option.” Information brought to you by Scott Underwood of Reverse Mortgage Alabama-Birmingham Office.