Reverse mortgages: are clients 'willing and able'?
Financial advisors may have to suggest various planning tactics, but other ideas come from clients themselves. "One retired couple, both age 66, walked in the door with the idea of using a reverse mortgage for purchase of their dream home, closer to family," says Clarissa Hobson, a financial planner with Carnick & Kubik, personal financial advisors in Colorado Springs, Colo. "They had read about it, and hired me specifically for the purpose of analyzing whether or not this would be a good idea."
Clients may like the idea of receiving a monthly check from a lender, effectively borrowing against their home equity. Online calculators can reveal the payoff. For example, at reversemortgage.org, presented by the National Reverse Mortgage Lenders Association, a 66-year-old couple with a $300,000 home would learn they could receive $917 a month, or about $11,000 a year, from an adjustable rate Home Equity Conversion Mortgage (HECM).
Federally-insured HECMs, which account for most reverse mortgages in the U.S., are offered to home owners 62 and older. Often, they provide needed cash flow. "The clients who have done it tend to be retirees who have a home with no mortgage but few other assets," says Dave Buckwald, a founding principal of Atlas Advisory Group, wealth managers in Cranford, N.J. "They want to tap into their home equity without having to sell the house, so they can remain there."
WILLING AND ABLE
The profile of a reverse mortgage borrower may be changing, though. Toby Dattolo, president of Heritage Mortgage Banking in Morristown, N.J., asserts that reverse mortgages are no longer directed toward borrowers in desperate financial need. "On the contrary," he says, "with its reduced fees and the new financial assessment, the HECM is now appealing to finance-savvy homeowners looking for additional tools to utilize in retirement planning."
As of April 2015, HECM applicants must undergo a financial assessment to determine if they're willing and able to maintain the home securing the loan. "In this assessment," says Dattolo, "willingness is determined through analysis of borrowers' past performance and credit history; capacity refers to a borrower's residual cash flow – a comparison of income and assets versus expenses."
Thus, reverse mortgages may become more of a retirement income tool and less of a life jacket for house-rich but cash-poor seniors. Nevertheless, reverse mortgages are not for everyone. "I analyzed whether the clients interested in buying a dream home should use a reverse mortgage or a traditional mortgage or existing assets for the purchase," says Hobson. "I concluded that a 30-year traditional loan would be the most advantageous to their long-term net worth, so they went in that direction." Among the greatest challenges, Hobson adds, was getting the clients comfortable with making mortgage payments after they hadn't done so for many years.
Donald Jay Korn is a New York-based financial writer who contributes to Financial Planning and On Wall Street.
This story is part of a 30-day series on Social Security and retirement income strategies.