The retirement expert wasskeptical of these loans butnow thinks retirees shouldgive them a second look.
Reverse mortgages are a controversial source of retire- ment cash flow. The loans can come with high fees, can place a burden on heirs and can be a vehicle forunscrupulous lenders to defraud seniors. But others liken it toan annuity that provides free rent long after the house is paidoff. This group includes economist Larry Kotlikoff, who was aguest on a recent webinar discussing reverse mortgages.
A onetime opponent, he now has changed his mind.
“I was always very skeptical, probably because [RMs] seemed
complicated and I always worried about the issue of people hav-
ing to move and having to pay back what I thought was going
to be a big bill,” Kotlikoff said in the webinar. “[However] the
median home equity of people 65 and older is about $150,000
[and] that’s a big number compared to their net worth.”
With a RM, that “trapped” home equity can be utilized.
Morningstar’s Director of Retirement Research DavidBlanchett was equally positive: “Conceptually, they (obviously)make a lot of sense,” he told Investment Advisor in an email. “Thehome is one of the largest assets for many retirees, and thereforebeing able to utilize that asset to fund retirement spending issomething that should be considered, especially since it enablesthe retiree to live in the house” for the rest of their life.
Pros and Cons
To do an RM, clients must be 62 or older and have 50% equity
in their home (for a government-protected RM). Yet they
still own their home and they must pay taxes, insurance and
upkeep on the home.
Some other positive RM aspects were pointed out by TomDickson of Financial Experts Network, who hosted the webinar:• An RM allows a client to convert that home equity, or“trapped equity,” into tax-free cash.
• The most popular form of RMs (99%) are those backed byfederal government.
• For couples, only one partner must be 62 or older toqualify. Those age 60 and older can qualify for proprietaryreverse mortgages (or jumbo RMs).
• Single-family homes, condos, townhomes and 2-4 unitapartment buildings (with owner occupying one unit) areeligible. The home must be a primary residence.
• No monthly payment is required.
• This is the only residential loan that comes with non-recourseprotection, usually a factor in commercial loans. For example,a couple lives in a home until they die. When their heirs sellthe home for more than what it costs to pay off the RM, theykeep the proceeds of the sale. If the RM is larger than whatthey can sell home for, the heirs (or even homeowners if stillliving) would not be responsible for making up that deficit —that’s where the Federal Housing Administration comes in.
Also, RMs come with some safeguards:
• If the client wants to repay the loan at any time, there is
no additional cost;
By Ginger Szala
Why Larry KotlikoffChanged His Mind onReverse Mortgages