Should Financial Planners Recommend Reverse Mortgages?
For many Americans, financial planning is a key part of maintaining and preparing a solid future. While not everyone employs the help of a professional financial planner, those who do often rely on their planners for expert advice and recommendations when it comes to retirement. A home equity conversion mortgage (HECM), also known as a reverse mortgage, is sometimes presented as an option for senior homeowners to increase their cash flow. You may recall that a few years ago, reverse mortgages and the lenders that offered them came under scrutiny due to irresponsible lending practices. Unfortunately, this gave reverse mortgages a less-than-ideal reputation, and many homeowners who might have benefited from the program shied away from it for fear that they would lose their home or be buried in debt. The good news is, thanks to recent changes in the HECM programs and an overall shift to more responsible lending rules, the reverse mortgage is coming back into the fold.
The changes, which were announced by the Department of Housing and Urban Development (HUD) in September 2013, make HECM loans more restrictive. Among other things, the changes will consolidate the HECM Standard and Saver loan options, change the principal limits that determine the maximum homeowners can borrow, and increase some of the costs associated with taking out a reverse mortgage. While this may seem counterproductive, it’s actually a beneficial change. The tighter parameters will help ensure that approved borrowers can afford the reverse mortgage, property taxes and insurance. What this means for financial planners is that they can send their clients in the direction of a reverse mortgage without as much concern for the client being taken advantage of or misled by unscrupulous lenders. Overall, the HECM program can be highly beneficial to certain borrowers who meet specific criteria, and experienced financial planners will be able to help determine whether or not a reverse mortgage makes sense for their clients.
In years past, some financial planners may have steered their clients away from reverse mortgage loans. This was likely due to the way in which the loans were granted, not necessarily because the loan was itself a bad idea. Before the economic downturn and mortgage crisis, a number of HECM borrowers defaulted on their loans due to being unable to pay (or unaware that they had to pay) their insurance premiums and property taxes. When the borrowers failed to make these payments, their lenders called the loan due. When they couldn’t afford to pay what they owed, the loans would go into default. This was in large part due to the careless lending practices of many financial institutions. Many senior homeowners were sold a reverse mortgage loan without being fully informed of their rights and obligations. Likewise, many lenders supplied these mortgages to borrowers who were not well-qualified for the program. Now, lenders are required by law to fully disclose information on reverse mortgage loans and make stronger efforts to ensure the borrower is aware of their financial obligations. By that same token, the recent changes that will begin going into effect this year and into 2014, will further secure the program and consumers from risk.
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How should financial planners approach reverse mortgages?
Financial planners are hired to help manage and plan out their clients’ financial future. For seniors, this can involve planning for retirement, nursing home care, in-home nursing care, investment property management, and other asset security. A reverse mortgage can benefit certain senior homeowners because the nature of the program allows the borrower to receive money against their home’s equity, increasing their monthly income or boosting their nestegg, if they opt for a lump sum payment. Senior homeowners who anticipate living on a fixed income, medical care or nursing care may be well-suited for a reverse mortgage. However, it should be noted that even with the recent improvements to the program, a reverse mortgage does carry certain risks. In some instances, the money received from a reverse mortgage may affect the borrower’s eligibility for certain government benefits. Also, the borrower must be able to afford to pay their property taxes and homeowners insurance, so reverse mortgage proceeds shouldn’t be the borrower’s sole source of money.
A skilled financial planner will understand the risks and benefits of a reverse mortgage plan and can help determine if such a program will make sense for their client. In some cases, a reverse mortgage may not be the best option for a client; however, there are a few instances where a financial planner may want to recommend a reverse mortgage:
- If the client has an overall retirement plan already in place and simply wants to supplement it with additional funds.
- If the client is financially secure enough to handle medical bills without relying on Medicaid.
- If the client anticipates the need for in-home medical care, nursing home care, or other major medical costs within the next few years.
- If the client owns their home outright, or owes very little on their mortgage.
- If the client and his/her spouse are of qualifying age (62 years or older)
- If the client has investment property and needs some extra money to help pay the mortgage on that property. (Note: a reverse mortgage can only be taken out on a homeowner’s primary residence, but the proceeds can be spent on investment property or a vacation home).
- If the client has a stable source of income, but needs additional money to help pay for a major, one-time expense like a home remodeling project, paying for a child or grandchild’s college tuition, or a medical procedure not covered by insurance. (In this case, a lump sum would likely be the best option, as the money will likely be spent immediately and won’t roll over to the next month, which could possibly impact the borrower’s assets/income, disqualifying them from certain means-tested government benefits, i.e. Medicaid. Ask a financial planner or experienced reverse mortgage lender for details).
Related: Learn about the roles and responsibilities of independent reverse mortgage counselors.