Since COVID-19 began, I have received many calls from financial advisors wanting information about reverse mortgages.
The conversations go something like this: “I’ve recommended that my clients slow their investment withdrawals while the economy is affected by the pandemic, but they’re not listening. They want more cash to fund their pre-existing lifestyle. Would a reverse mortgage give them more liquidity so they don’t feel the need to draw down their funds?”
Often, the answer to their question is yes.
It’s a question that’s timely not just because of the pandemic, but because of the changing outlook for individuals who are in their 60s. With decades of life ahead, they want to thrive — not just survive — as they pursue their life goals. A reverse mortgage (for those who are at least 62) can potentially provide them with cash to move their dreams forward, pandemic or not.
Chances are that many of your clients know nothing about reverse mortgages. Simply put, these specialized loans enable homeowners to convert a portion of their equity into tax-free money.*
If these borrowers remain in their home, they never have to make a single loan payment — though they are still responsible for property taxes and insurance. The balance will be due when they sell the home or pass away; at that point, the lenders will deduct the balance from the sale proceeds.
There are several different forms of reverses, including jumbos. For example, HECM (Home Equity Conversion Mortgage) reverses enable individuals to borrow 45% to 75% percent of their home’s current value.
What are some applications for these reverses that are especially relevant now? Here are several fictional scenarios illustrating many of their possible uses.
Converting to a Roth IRA*
Consider David and Susan, who own a $3 million home in Boston. Both of them are self-employed consultants with traditional IRAs, valuing a total of $835,000.
They had always assumed that when they were ready to retire they would have a lower tax burden.* Now, with so much economic uncertainty for the future, they are not sure that they can count on a lower tax rate. Many advisors are forecasting higher rates in the future and feel it might be a better idea to pay taxes on “the seed instead of the harvest”!
But the problem with doing a Roth conversion is that usually 20-30% of the portfolio is needed for taxes which dramatically decreases their portfolio.** However, they take out a reverse mortgage and plan to use some of the money to pay the taxes that they are going to incur when converting the traditional to the Roth. That leaves 100% of their funds to continue to increase tax-free* (not tax-deferred) for the rest of their life as well as being able to pass it to the children tax free.*
Historical numbers are not guaranteed but the cost of the interest and closing costs are typically going to be less than paying greater taxes and losing investment gains in the future on their nest egg.**
Heather is single and has no children. She is passionate about supporting environmental organizations, and had planned to help several charities through her legacy.
Seeking to make a more immediate impact, she takes out a $300,000 reverse mortgage, and donates $200,000 to her favorite nonprofits (although she could have also put the funds into a charitable trust).
Not only does she have the pleasure of giving while she is still alive, she has not depleted any retirement assets — and she has received a charitable deduction as well. She leaves the remainder of the cash in a growing HECM line of credit for future gifting.
More Comfortable Retirement
Several years ago, Jane and Steven refinanced their expensive 7,000-square-foot home with an interest-only mortgage to take advantage of cheap money. They want to retire within a year, but their monthly payments are about to balloon in size to include both principal and interest.
The only way they can handle the increase is by drawing more from their retirement funds. A jumbo reverse mortgage enables them to pay off the balance of their original mortgage before the change takes effect, and to go from an interest-only payment to no required payment. They also benefit from the continued growth of their retirement funds by keeping them invested.**
Joanne and Jim are quite comfortable — but because Jim is a cancer survivor, he doesn’t qualify for any of the long-term care policies. Rather than funding care with their investments, they take out a reverse mortgage to pay for it.
Donna and John have just retired from successful careers as attorneys. They use a reverse mortgage on their current home to tap into equity to buy a vacation home without depleting other funds.
These are just a few of the examples that financial advisors encounter every day. Other potential scenarios include:
• A woman who is widowed, and loses the benefit of her husband’s high salary — A reverse may enable her to stay in their home and maintain her current lifestyle without drawing down assets sooner than expected.
Back to a New Normal
In the pandemic, a reverse gives affluent clients much more flexibility to maintain their investment strategy and continue living with comfort and ease. COVID-19 has already thrown so much out of balance; a reverse mortgage can frequently help bring life back to “semi normal” despite the unpredictable future ahead.
Bonny Gilbert, Esq., NMLS #300106 leads the Bonny Gilbert Reverse Team with Fairway Independent Mortgage Corporation, Boston. She is licensed in Mass., Conn., Maine, N.H., N.Y., N.J. and Va. Contact her at firstname.lastname@example.org or 857-300-6775.
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* This advertisement does not constitute tax advice. Your clients should consult a tax advisor regarding their specific situation. ** This advertisement does not constitute financial advice. Your clients should consult a financial advisor regarding their specific situation.