New York Times Says Reverse Mortgages Are No Longer Just For Homeowners Short On Cash

Back on April 5, 2022, The New York Times published an article highlighting how the Home Equity Conversion Mortgage (HECM) can be used when creating a comprehensive financial plan for retirement.  
New York Times Says Reverse Mortgages Are No Longer Just For Homeowners Short On Cash

The author used the example of Marjorie Fox, a retired financial planner, who opened a HECM line of credit when she retired a couple of years after her husband passed away.  

Quoting from the article: Ms. Fox, 75, had set aside $150,000 in a cash reserve, and the reverse mortgage was another backup. If something unexpected did happen, “it could be when the stock market is down and it could be an inopportune time to sell assets,” she said. Reverse mortgage borrowers can take the money as a lump sum, as fixed monthly payments or as a line of credit. Ms. Fox chose a line of credit, which she could tap as needed.

Ms. Fox was able to use a portion of the HECM funds to pay for emergency dental work, as well as for a down payment to reserve a spot in a retirement community set to open in 2025 while still keeping a large amount in her line of credit.

The article also talks about a study in the Journal of Financial Planning from December 2021.  The study is titled “To Reduce the Risk of Retirement Portfolio Exhaustion, Include Home Equity as a Non-Correlated Asset in the Portfolio”.    This is a 42-page study that you can read for free with the link provided at the bottom of the page.

The study talks about protecting your nest egg by using a coordinated strategy using reverse mortgage funds at strategic intervals when circumstances are unfavorable to drawing down investment assets.

Quoting again from the article:  Taking withdrawals from investment accounts during market downturns, especially early in retirement, can wreak havoc on the longevity of a portfolio. Instead of locking in losses, a retiree who uses a “coordinated strategy” could cover expenses and protect savings by pulling funds from a reverse mortgage when markets drop, according to several studies.

“When a portfolio is down, taking something from it drives it further down and makes it much harder to come back,” said Barry Sacks, a pension lawyer who conducted studies that showed using a reverse mortgage during market downturns could help portfolios stay on track.

To use this strategy, retirees should look in January at how their portfolio compares with a year earlier. If it has shrunk because the investments declined, they should pull cash for the coming year’s expenses from their reverse mortgage and enable the investments to recover.

Overall, I think this is a very good article with one exception.  Throughout the article, the author talks about the HECM line of credit as earning interest.  This is a pet peeve of mine when people say this because the line of credit does not “earn interest”.  If it earned interest, the borrower would have to pay taxes on it and would never have to repay it.  That is not how it works.

The line of credit grows at a rate of 0.5% greater than the rate charged on the loan balance.  The growth of the line of credit is not a gift and it is not interest earned.  It is simply increasing the amount the homeowner can borrow.  I liken it to your credit card company increasing your limit on your credit card.  If you use it, it must eventually be repaid with interest.  The same applies with the HECM line of credit.  Any funds the homeowner withdraws from this account will be charged interest and will be added to the loan balance and have to be repaid, with interest, when the loan comes due.

This article is worth the five to six minutes it would take to read.  You can read it here if you are inclined.  

The study the article references from the Journal of Financial Planning will take you a bit longer to read, but it is also very worthwhile.  You can review/read it here.

Bruce E. Simmons, CRMP
Reverse Mortgage Manager
American Liberty Mortgage, Inc.
Cell: 303-513-2748

Bruce Simmons

Bruce Simmons

I absolutely love what I do - working with senior homeowners to help them live a more comfortable, flexible and secure retirement. I have the absolute best customers in the world, and even though I worked in the forward mortgage business for a number of years, I could never go back to doing conventional loans. I'm a 100% reverse mortgage specialist.

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