Using A Reverse Mortgage to Help with Financial Planning

Using A Reverse Mortgage to Help with Financial Planning

Before we can discuss the potential uses of a reverse mortgage in helping to craft a financial plan, we have to answer the question – Should home equity be taken into consideration when creating a wholistic, sustainable financial plan to help people live the life the want during their retirement years?

“An important part of retirement planning is determining how much you can withdraw annually from your portfolio, based on a set of assumptions about portfolio strategy and future market performance.” Said Dan Hunt, senior investment strategist in an August 2022 article posted on Moganstanley.com. “When a plan based on those assumptions can’t support your desired level of spending in retirement, it may lead you to sacrifice spending or take more risk to boost investment returns.”

“Home equity can change that equation and prevent retirement investors from either making unnecessary sacrifices, or worse, taking more investment risk than they are comfortable with.”

It seems to me that with 70% of the typical American homeowner’s net worth tied up in their primary residence,* if there is any doubt int the client’s ability to sustain the lifestyle they want in retirement, considering home equity in the plan is a must. Just because it is discussed, does not mean it has to be used, but it should at least be considered.

There are three different ways to tap the equity in the home.”

  • Sell the home – Of course this means either renting or purchasing a new, preferably cheaper home. If the less expensive home is chosen, the homeowner can use the profit to help fund their retirement lifestyle.
  • Refinance or a Home Equity Line of Credit – unfortunately, both of these options add to the monthly expenses and reduce cash flow.
  • Reverse Mortgage – If the homeowners want to stay in the home, this could be a good option. Let’s dig into the different ways this option can be used as well as the pros and cons.

Most reverse mortgages are insured by the Federal Housing Administration (FHA) and are called the Home Equity Conversion Mortgage (HECM). These are loans that are specifically designed for people aged 62 and above, that allows them to borrow a portion of the value of their primary residence without having to sell their home, give up title, or obligate themselves to a monthly mortgage payment.

Since the home stays in their name, they must continue to pay their property taxes and homeowners insurance and maintain the home. But there is never a monthly payment required to the lender. Interest and mortgage insurance is still charged on the outstanding balance of the reverse mortgage.

For more details on how a reverse mortgage works, please visit this page for the details.

The HECM is a very flexible program that allows homeowners to withdraw funds from their home in a number of different ways:

  1. Lump Sum
  2. Line of credit
  3. Monthly payments
  4. Any combination of two or more of the above

I want to touch on each one of these and explain how it can be used to help retirees (or soon to be retirees), to live the lifestyle they choose.

Lump Sum

If a homeowners still owes money on an existing mortgage, they can use the proceeds from the reverse mortgage to pay it off and eliminate the principal and interest portion of their payment saving them hundreds of dollars or more per month. This is extra money that can go to increase cash flow, add to savings or investments, or it may mean the borrowers can reduce the amount they withdraw from their retirement savings.

However, if they are still working and want to continue to make payments until they retire, they have the option to make payments. The payment is optional. If they can not make a payment one month, the only repercussion is that interest and mortgage insurance for the month will be added to the loan balance.

But there are numerous benefits to making payments. The first being that the balance is lower after a payment is applied reducing the amount of interest and mortgage insurance that is charged the next month.

The second benefit of making a voluntary payment on the HECM is that every dollar that is paid towards the outstanding loan balance, is added to the available line of credit (see below for details). This option is only available on the adjustable interest rate option, but it allows the homeowners to make payments while they are working to keep the loan balance down, then have more money available later when they retire and no longer want to make payments.

This is just one method homeowners can use with the lump sum option. They can also use the money to eliminate high interest credit cards, home improvements or even using it as a down payment for a second home. The options are endless.

Line of Credit

The line of credit (LOC) allows a homeowner to set aside unused funds from the HECM that are not immediately needed or wanted. When homeowners qualify for a reverse mortgage, the amount they

qualify for is based on a formula that takes into account the age of the youngest homeowner, the value of the home and the “expected” interest rate. Quite often, the amount they qualify for is more than they want to borrow.

The lender has to make the money available, but they homeowners do not have to take it all. In this case, if they choose an adjustable rate, the lender can set-aside the unused funds in a LOC. The borrowers are not charged interest on these funds until they withdraw them. It works just like a traditional “Home Equity Line of Credit” (HELOC), from a bank, but with a lot more benefits, including:

  • LOC growth, giving borrowers more available funds in the future.
  • The LOC can never be reduced or closed by the lender as long as the borrowers meet the loan obligations.**
  • HECM’s are non-recourse meaning that the borrowers can never be obligated to pay more than the value of the home when the loan is repaid.
  • The borrowers can convert funds in the line of credit into a monthly payment at any time in the future if needed to increase their cash flow.
  • The funds in the LOC are insured by the Federal Housing Administration (FHA).

I’d like to expand on the benefits above, I am sometimes asked the question, “ What is the benefit for me to get a reverse mortgage if I own my home free and clear?”

I have closed a lot of loans for people in this exact situation and the benefit is something we refer to as a “stand-by line of credit”. Having funds available that grow, independent of the home’s value without risk, can provide additional available funds in future years when costs from things like inflation and healthcare increase.

The LOC can also be used as a cash reserve fund for emergencies allowing the borrowers to keep more of their funds invested and growing. However, should their invested funds be hit with a market downturn, the LOC is available so the borrowers will not have to draw funds from their investment portfolio when the market is down. Once the market improves, they can, if they choose, repay the funds used from the LOC to have them available in the future. This is looked at as an excellent risk management tool and help increase the life of the portfolio.

Monthly Payments

Homeowners can definitely lower their payments by eliminating their principal and interest payments, but if there is enough money left after paying off the existing mortgage, or if the home is owned free and clear, one very easy way to increase cash flow is to establish a monthly payment. This is where the lender deposits a set amount of money into the homeowners’ bank account every month.

This monthly payment can be set up to last as long as either homeowner lives in the home (tenure payment plan), or it can be over a set term of months or years (term plan). At the end of the term plan, the payments stop, but the loan does not come due. The HECM loan only becomes due and payable when the last homeowner permanently leaves the home or if they fail to meet the obligations of the loan.**

Some homeowners will use the tenure plan to supplement their ncome so they can draw less money every month from their retirement savings. Others will use the term plan to make payments on a very

low or zero interest car loan, or even to supplement their income until they reach full retirement age and can receive their full Social Security benefit.

Combination

This is by far the most popular method homeowners use to receive funds from their HECM reverse mortgage. Over 85% of my customers still owe some form of mortgage on their home. They will typically use a lump sum to pay of the outstanding mortgage, and leave the rest in the line of credit or take it as a monthly payment.

However people decide to use the money, a HECM is a flexible option that can help extend the life of their portfolio.

*Primary Residence Value As A Percentage Of Net Worth Guide Updated: 11/05/2022 by Financial Samurai https://www.financialsamurai.com/

** The obligations of the borrowers are to pay and stay current on their property taxes and homeowners insurance premiums, maintain the home, live there as their primary residence and keep their name on title.

Want To Learn More?

We just released a podcast that goes into more detail titled: Should Home Equity Be Taken Into Consideration When Creating A Financial Plan?

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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.

5.0

My wife and I are retired and had a mortgage that was quite high. We contacted Bruce regarding a Reverse Mortgage and were pleased with his knowledge and experience. He made the whole process very easy and explained everything along the way. Since then, I have had a couple of questions and contacted him regarding the RM. Bruce has always been very responsive and returned our calls within minutes. We couldn't be happier having used Bruce for the Reverse Mortgage and highly recommend him.

Bruce has been serving my interest over and above what one might expect during the whole process of handling my reverse mortgage dating back to 2010 and continues to be available at present whenever a question may arise. He is one of the most reliable, trustworthy and knowledgeable experts regarding reverse mortgages that I have had the privilege to do business with! I would highly recommend Bruce to anyone who is considering a reverse mortgage. Thank you Bruce!

I met Bruce from a referral who just love what he did for them on their Reverse Mortgage, So I contacted Bruce and told him my story and he came up with a great Reverse Mortgage for me and my needs and now I am living good and not worrying about Finances anymore. He had it done in a timely manner. If you are looking for the MAN to help you get the best Reverse Mortgage you need to call him and hope you let him help you.

Bruce is one of the most professional, knowledgeable and efficient experts I have worked ŵith ever in any field. He is fast to answer and always ready to help...and he's a great guy!

Gerald Cook
Gerald Cook
5.0

Bruce did our original reverse mortgage and has also refinanced it twice. He works hard to get the best deal possible while making it as easy for us as possible. When our first refinance received a low initial appraisal, Bruce helped the appraiser find better information and increase the appraised value. He's the best.

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!

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John Addante
John Addante

Left us a 5 star review

My wife and I are retired and had a mortgage that was quite high. We contacted Bruce regarding a Reverse Mortgage and were pleased with his knowledge and experience. He made the whole process very easy and explained everything along the way. Since then, I have had a couple of questions and contacted him regarding the RM. Bruce has always been very responsive and returned our calls within minutes. We couldn't be happier having used Bruce for the Reverse Mortgage and highly recommend him.

Bruce has been serving my interest over and above what one might expect during the whole process of handling my reverse mortgage dating back to 2010 and continues to be available at present whenever a question may arise. He is one of the most reliable, trustworthy and knowledgeable experts regarding reverse mortgages that I have had the privilege to do business with! I would highly recommend Bruce to anyone who is considering a reverse mortgage. Thank you Bruce!

I met Bruce from a referral who just love what he did for them on their Reverse Mortgage, So I contacted Bruce and told him my story and he came up with a great Reverse Mortgage for me and my needs and now I am living good and not worrying about Finances anymore. He had it done in a timely manner. If you are looking for the MAN to help you get the best Reverse Mortgage you need to call him and hope you let him help you.

Bruce is one of the most professional, knowledgeable and efficient experts I have worked ŵith ever in any field. He is fast to answer and always ready to help...and he's a great guy!

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!