Many times, people think of a reverse mortgage as something that people only use as last resort. Once all retirement accounts have been exhausted and all other options have been explored, then it’s time to examine a reverse mortgage, but what if data suggested otherwise? What if the right move is to examine the reverse mortgage early and use it preemptively? Many people who are on the cusp of retiring were not able to save enough for retirement for a multitude of reasons. The inability to save enough for retirement has led many in this group to keep more risk in their portfolios than is recommended in order to make up lost ground. Many of them have made up lost ground with the big gains that most Americans who own stocks have experienced over the last decade. This could all change in a hurry if we are not able to achieve the “soft landing” that the Federal Reserve has been trying to stick. If the Fed can’t thread the needle and we have a significant recession, many who just needed a few more years of work in order to get to full retirement and sock away money in their retirement accounts will face the harsh reality of a 20% to 40% loss in to their nest egg, as well as a layoff. This means that they may have no other option than to tap those retirement accounts a few years early while also selling investments at a loss. This will wreak havoc on the future performance of their retirement accounts. In this scenario, thousands if not millions will not have money at the end of retirement leaving them in a position of dependence. What if this could be stopped? If a person has fully paid for their home or has a low mortgage balance, a federally insured reverse mortgage line of credit with a montly disbursement could be a game changer.

Let’s walk through a scenario. Mary, who is 68 years old went through a divorce 8 years ago. Mary wanted to stay in the family home valued at $400,000. She received a portion of the couples qualified retirement account that came out to be $200,000. She also received half of the couple’s cash savings of which her portion was $30,000. Mary had some really good fortune in that her real-estate nearly doubled to $700,000 over the 8 years since her divorce. She was also able to put back an average of $30,000 per year into her employer sponsored 401k retirement plan with an average return of 10.2%. Her home was worth $700,000 and she had $780,000 in retirement savings when the news came that due a down turn in the commercial lending department where she worked in as an underwriter, she would be laid off. The sector as a whole was in a down turn, so Mary did not feel confident that her plan of working until 70 would come to fruition. Another blow to her plan was that a recession had officially been declared and the stock market was in the midst of a major sell off. Her retirement account was now sitting at $690,000 and seemed to be dropping in value every day. So just as in every tough moment in her life, Mary had to dig deep and find a solution. She applied for social security after her unemployment and severance pay had run its course. She would receive $3,200 per month. She knew that this much alone would not cover her basic monthly expenditures of $5,000 dollars. She was looking at an $1,800 monthly deficit, and the thought of dipping into her retirement account when it was down and still losing money was alarming to her. So, she had a meeting with her advisor to finalize a plan for her. They had spoken once about 6 months earlier. At that time, they did a good bit of fact finding and conversing, but now was the time to start making decisions.

During those 6 months, her advisor David had looked at different options for clients in similar situations. He began to understand how a federally insured reverse mortgage could possibly bridge the gap for certain clients. He called a professional he trusted in the reverse mortgage industry and worked on a potential solution to share with Mary at their next meeting. David fully understood that the impact of sequence of return risk to his client. He knew that taking money out of her account while her investments were down would have a significantly negative impact on the longevity of her retirement savings. So, he asked a trusted professional in the reverse mortgage industry to run a projection for him. He asked for the reverse mortgage to disburse $1,800 per month for three years then stop the disbursement. This would allow for Mary’s portfolio to start recovering from the recession losses before any funds were withdrawn. The reverse mortgage also provided a federally insured open-ended line of credit that would grow over time. This reverse mortgage line of credit would be waiting in the wings in case of an emergency or the inevitable next economic downturn. David was truly amazed at how much longer Mary’s assets would last by not taking withdrawals during a period of negative returns in the market.

If you or a client, friend, or family member would like more specifics about how this strategy could potentially benefit, please do not hesitate to reach out. We have helped many clients in similar situations using the federally insured reverse mortgage. The reverse mortgage loan is our only focus, and we have done over 3,000 of these loans since 1993.

Unfortunately, some grandparents are put in the very difficult position of raising their grandchildren. There are various reasons as to why this is the case. One thing is for sure, this reality transcends socioeconomic lines. Let’s take a look at a way that I recently helped a pair of grandparents that found themselves in this precarious situation. For the purpose of this blog, I will call our client’s the Martins. The Martins became guardians of their granddaughters two years ago. The oldest age 16 and the youngest age 13. Mr. Martin age 68 and Mrs. Martin age 67 were not anticipating that they would need to raise children during retirement. However, when they were called upon, they stepped up to the plate and I commend them for that. Here is how the Martin’s were set up for retirement. The Martin’s receive $4,200 a month in combined social security benefits. They had paid for their home along with all other debt. They fully paid for an automobile that would hopefully see them through the majority of their retirement and had around $50,000 in cash savings. They also had saved $275,000 in their pre-taxed retirement accounts. This allowed them to live a reasonable lifestyle. Their goal was to live within their
means and use the $50,000 in cash savings for larger unforeseen expenses. They wanted to leave their IRA intact without withdrawals for as long as possible so that it could continue to grow until they began taking their required minimum distributions. Needless to say, their plans had to be recalibrated once they became the guardians of their granddaughters.

The average cost of raising a child according to the Institute of Family Studies is a whopping $1,438 dollars a month! So, its not surprising that over the last two years the Martins have spent down $35,000 of their cash reserves. Once they realized that the rate at which they are spending is unsustainable, The Martins started exploring solutions for their dilemma. First, they looked at a traditional cash out refinance of their home. Then they explored a traditional home equity line of credit. They quickly understood that obtaining more debt in the traditional manner was not the solution that would work for them. They needed additional cashflow plain and simple. This is where Mortgage South of Tennessee was able to provide a solution that fit their situation.

The Martins called me and gave me a brief synopsis of their situation. They scheduled an appointment and I gathered some more detailed information from them. Once my analysis was complete, I provided a potential solution with a HECM (also known as the federally insured reverse mortgage). First, I wanted the HECM to provide much needed positive cash flow to the situation so, I created a monthly distribution to them of $2,000 a month for a specific period of time. In their case, I proposed 5 years because the youngest granddaughter would be 18 at that time. Next, I used the reverse mortgage to create additional emergency funds that would be there for the inevitable home repair, etc. This would give them the peace of mind that they still had $15,000 remaining in cash and another $95,000 in their new found HECM emergency fund. This reverse mortgage solution allowed the Martins to add $24,000
of positive nontaxable cashflow to their family budget until their youngest granddaughter reaches age 18. It also created a HECM line of credit of $95,000 for emergencies, and finally allowed them to keep their original plan in place of not tapping into their taxable IRA account until it was time to start taking their mandatory distributions from their qualified IRA. A federally insured HECM reverse mortgage will not provide the correct solution for every situation, but when it does, it is a game changer for retirees trying to navigate a world that has become increasingly more financially complicated.

 The news on the financial front for folks in retirement is both good and bad. Let’s have some good news first. Those retirees who have been fortunate enough to have owned a home and or have saved for their golden years, have in many cases experienced as much as a 40% increase in their real estate asset values.  Also, they can finally receive favorable interest rates on certificate of deposit accounts. I’ll give you an example. My mom is a retired schoolteacher. As a single mother, she raised my brother and I on modest pay. She never was able to save above what was taken out for social security and her state provided pension program. Fortunately, the state of Georgia currently provides a nice pension benefit, so she lives comfortably now and even saves money each month. She is in her late 70’s and lives alone and independently. A few health scares and the ever-present maintenance needs of her long-term residence caused her to recognize that it was time for a transition. So, with the help of my brother and I, she listed her home and sold it at the peak of the post covid real estate frenzy. She now rents a very affordable and nice single level cottage from longtime friends she had developed from her church.  Her rent is well below the national average for a property of this type, so after running the numbers, renting made a lot of sense for her situation. She cleared $240,000 from the sale of her home. After paying off her car and adding $20,000 to her cash reserves, she wanted to place the balance of her funds in interest bearing accounts. She has no investment experience, so her risk tolerance is very low. With the help of a financial advisor, we laddered her funds in FDIC insured CD’s. She will average 5.3% for 3 years from the start of the plan. My mother is ecstatic about a $30,000 gain over 3 years with no risk! It’s been well over a decade since anyone with savings could reap this type of benefit.

Now let’s face the bad news. Retires are faced with inflation and borrowing cost at a forty and twenty year high respectively. Social Security benefits have increased thanks to the cost-of-living adjustments of 5.9, 8.7 and 3.2% in the years 2021-2023.  The aggregate increase of 17.8%, while helpful, doesn’t fully offset the increased cost of the inflation ratchet. For this blog post, I will highlight the impact of inflation on transportation. According to Edmunds’ latest data, the share of 1,000+ monthly car payments has reached 17.5% in Q3 of 2023. That’s up from 17.1% in Q2 of 2023 and a massive increase from the meager 4.3% back in 2019. The average car payment in Q3 of 2023 reached a record high of $736 per month for new cars, up 4.5% since Q3 of 2022 and a 32% increase from 2019! Meanwhile, the average monthly car payment for used cars is $567 making a 46% rise from 2019! So, I believe it is apparent that an individual in retirement has a lot of trepidation when it comes to the prospects of purchasing the highest priced ticket items outside of a new home. Let’s not forget, this is just one sector of the economy that has seen massive increases in cost due to inflation.  Inherently retirees are on some type of fixed income. Whether it is a standalone social security benefit or a combination of social security and other savings. The number is finite. So, this leaves many of them and the people that advise them searching for ways to offset inflation in order to maintain the standard of living and essential services that they have grown accustomed to. One way to help alleviate this is by using the federally insured HECM, also known as the reverse mortgage loan as a solution. Let’s cover the process step by step. The first step is education. I sit down with my clients and ask a series of questions that help me understand how they are positioned financially. Then I will explain the ins and outs of the reverse mortgage loan. Once the program has been fully explained and all questions are answered, I ask my clients to express any concerns they have for their current and or future financial needs. The next step is catering a solution for their specific situation.

Now, let’s look at an example of how I helped a particular client utilize a HECM or reverse mortgage loan to purchase a new vehicle and provide additional resources for future retirement needs.  For this blog, I will call my client Henry.  Henry owned a small business here in Chattanooga, TN. He enjoyed his work until his early 70s. He had to close his business because the technology had changed dramatically, and it did not make sense for him to invest in updating the equipment needed to keep his business going. Henry had saved around$300,000 in his tax deferred IRA.  He also had a paid for home that is located in a very sought after area of Chattanooga. He called my office because he was interested in finding out how or if a HECM reverse mortgage could improve his current and future financial standing. During our initial conversation, Henry mentioned that his car was in good shape, but it lacked the safety features that he thought were important for him to have as he becomes an aging driver. He wanted to purchase a car with the features but didn’t want to increase his taxable withdrawals from his IRA to do so. So, I went to work for him and created an option that allowed him to tap his home equity in a unique way to accomplish his goals. His home appraised for $530,000. This allowed him to have a total of $230,000 in available reverse mortgage proceeds. Now the neat part of this is how funds were disbursed to him in a way that met his needs. First, I provided a monthly disbursement of $765.00 per month for 6 years. This provided funds to cover the purchase of a new car that provided him with all the safety options he desired and covered the increase in his auto insurance premium. Second, I provided a HECM or reverse mortgage line of credit of $181,000 that grows over time regardless of the fluctuations in housing values. All monthly disbursements and the line of credit are federally insured. So, Hennery can rest assured that his transportation and future retirement needs are now standing on solid ground.

In my line of work, I meet with clients that are either entering or are currently in retirement. One question that I ask married couples is, are you prepared for life after the loss of a spouse? Most of the time I get sort of a blank stare and then each spouse looks to one another for an answer. Needless to say, this strikes an uncomfortable chord with nearly all of them. I totally understand why this is the case. I myself have been married for close to two decades now to my lovely wife and business partner Candy. We have three great sons together and are constantly talking about what life will look like when we are able to take the next big adventure of our lives together “retirement”. We have taken care of the estate planning several years ago; however, that is just the technical part of it. I know there is more work to do in this arena from a financial planning perspective. Making sure both of our names are on all of the deeds to all of our major possessions, cars, etc. It’s just a very tough exercise and conversation because we just don’t want to think about it.

I have seen first hand how avoiding this subject can be devastating when a spouse is suddenly lost. Once the initial fog of grief has dissipated, two primary questions seem to come to mind for the surviving spouse. 1. Who am I as an individual, and what is now going to be my purpose for the rest of my life? 2. What is my financial position, and am I going to be able to maintain my standard of living for the balance of my retirement? I am not qualified to counsel with someone on the first question. However, the service that we provide can make a big and positive impact on an individual’s financial security during retirement.  Our company Mortgage South of Tennessee completed the very first federally insured HECM also known as the reverse mortgage in 1993. Since then, we have advised our clients on how to strategically deploy their home equity during retirement in order to shore up their financial position.

I am going to give two scenarios that illustrate how we have helped our clients maximize all of their available assets during retirement in order to shore up their financial positions. In the first scenario, John age 70 and Sara age 68 are referred to me by their financial advisor. Their home valued at $400k is paid for and they have a total retirement savings of $500k. Of these savings, $75k is cash or cash equivariant accounts. The other $425k are in qualified retirement accounts. “Qualified” retirement accounts are typically the employee sponsored retirement accounts that have been transferred into individual accounts after retirement. When an individual withdraws funds from these accounts, a taxable event takes place. So, if someone who has a $425k qualified IRA and they are in a 22% tax bracket they effectively have $331,500 after taxes are accounted for. John and Sara have a combined income of $6,500 a month. This is comprised of John’s social security benefit of $2,800, Sara’s social security benefit of $2,100 plus Sara’s $1,600 pension benefit. John and Sara have had a conversation with their financial about the” what if” scenario of one of them passing prior to the other. Their advisor explained to them that when people are married and one spouse passes, only the larger of the two social security checks will be available for the surviving spouse. They also reviewed Sara’s retirement separation paperwork and now understand that the surviving spouse would receive half of her current benefit. So, in John and Sara’s case, John’s monthly income would be $3,400 should Sara pre decease him. Sara’s monthly income would be $4,400 should John Pre decease her.

This did not sit well with John, Sara or their advisor, so they began to think of possible options to hedge against such a significant loss to their monthly cashflow in the event of the loss of a spouse. That’s were Mortgage South and the federally insured HECM or Reverse Mortgage comes into play. I sat down with John and Sara and completed a needs analysis. After completion, I proposed that they deploy the HECM stand by line of credit strategy. Now let me explain how that works. Based upon Sara’s age of 68, because she is the youngest spouse, the appraised value of $400k and the current expected interest rate of 6.380%, John and Sara would have a HECM “Reverse Mortgage” line of credit with an availability of $137,059. Next is the cool part and in my option the best kept secret about the FHA insured HECM loan. John and Sara’s HECM line of credit will not stay stagnant. Every month that they do not use their reverse mortgage line of credit, it grows and they have more access to additional funds! The stand by line of credit strategy would mean that John and Sara leave their HECM line of credit waiting in the wings until it is time to deploy it. Let’s say that in ten years John or Sara were to unfortunately pass away, their reverse mortgage line of credit that started out at $137,059 is now valued to the remaining spouse at $254,131 an increase of $117,072 or 46% from its original starting point! John or Sara could now start a monthly distribution to themselves in order to replace the loss of income due to the passing of their spouse there by maintaining the standard of living that they have been accustomed to for the entirety of their retirement. Now, I’m sure that you may have detailed questions that you would like to ask. I highly encourage you to reach out to me for a one-on-one conversation. This strategy will not fit every couple in retirement; however, in my opinion, thousands of middle to upper middle income retirees should at least be educated on how home equity can or should fit into their retirement planning.

When it comes to leveraging the value of a home, both a home equity line of credit (HELOC) and a home equity conversion mortgage (HECM, reverse mortgage) are options to tap into your home equity. However, a HELOC is not necessarily the most appropriate option for older homeowners, ages 62+.  

HELOC vs HECM: How Do HELOCs Affect Borrowers?

Due to the unprecedented rise of interest rates that started in March of 2022, HELOC monthly payments have doubled, or in some cases tripled and created a strain on borrowers. We have received many calls about homeowners not being able to afford their HELOC payment anymore. Home equity lines of credit come with variable rates. This means that their rate can go up or down based on the decisions of the Federal Reserve — so even if our borrowers took out a HELOC with a low rate, they are now facing much higher interest rates on their monthly payments. Also, HELOC loans mature at either 5 or 10 year intervals. When they mature, the borrower must re-qualify or begin to pay back both principal and interest, typically over a 20 year period with full amortization. This can cause even higher payments and has even led to forcing the sale of the home or foreclosure. With most retirees on a fixed income, the increase in monthly payments at the end of the draw period can be an unwelcome surprise.

Why HELOCs May Not Be the Best Option for Senior Homeowners

Many borrowers in an older age bracket have managed the revolving debt for as long as possible, but now their savings have been depleted as interest rates continue to skyrocket. According to a new GOBankingRates survey of 1,000 people, about three out of four have savings accounts, but the biggest percentage by far — about one in three — have only $100 or less stashed away. American consumers are depleting the “excess savings” they accumulated during the COVID pandemic. Americans’ excess savings from the pandemic peaked at about $2.1 trillion in August 2021 but fell to roughly $500 billion as of this spring, according to estimates by economists at the Federal Reserve Bank of San Francisco.

This problem is most acute with older Americans because of the likelihood that they are on fixed incomes. Even high-yield savings are depreciating assets. Savers with the highest-yield accounts are growing their money at 4.5% while that money loses 7.6% of its buying power.

How Might HELOCs Reduce Your Available Assets?

Many people get a HELOC while they are still working to do home repairs, put a child through school, start a business, etc. —but the problem arises ten years later when they’re living on retirement cash flow that’s about 75-80% of what it used to be prior to retirement. And when their HELOC payment suddenly spikes up a few years after they’ve retired, it may create a serious cash flow problem. With HELOC payments doubling or tripling and savings/IRAs depleting, Americans (specifically older Americans) are really running into a cash crunch. Medical payments, revolving debts, and general inflation are snowballing into a potential bankruptcy looming over many seniors. 

Why a Reverse Mortgage (HECM) May Be Your Best Option

This is why it is important to see a reverse mortgage as a financial planning tool, not a last resort. Many borrowers are refinancing from a HELOC to a reverse mortgage, once they realize it’s the better choice in the long run because with a HECM, seniors’ financial stability can’t be jarred by the possibility of a payment spike. A reverse mortgage is like few others you’ve experienced. You have no monthly payment and have access to a line of credit. It turns the equity you’ve built in your home into cash. Depending on the terms you select, you can receive monthly payments, a lump sum, or another payment option. However, it is similar to other loans in the sense that you still own your home, the property must be the borrower’s primary residence, and you still maintain taxes and insurance on the property. You can also sell your home at any time with no prepayment penalty or leave the property to your heirs. 

Reverse mortgages are designed specifically to help seniors manage their cash flow. While payments may be piling up and inflation at the highest we’ve seen in four decades, taking out a home equity conversion mortgage, or a reverse mortgage, can be extremely beneficial. Perhaps the two biggest benefits of a HECM are that there are no monthly mortgage payments required and there will be a growing line of credit that can be accessed over the life of the loan. With the average monthly payment on a HELOC now hovering around $800-$1300, obtaining a reverse mortgage presents a major savings opportunity every month. 

Contact Us for Help With Your Reverse Mortgage

Utilizing the equity in your home to fund your retirement is a viable option that benefits many seniors. The federally insured reverse mortgage, or HECM, enables homeowners to eliminate their existing monthly mortgage payment. At the same time, it offers a growing standby line of credit for future needs. If you think that a reverse mortgage is right for you – get in touch with Mortgage South today!

Do you have clients thinking of pulling out of equities due to Bear market fears and volatility? A HECM “reverse mortgage” stand by line of credit can provide security that keeps them invested during trying times.  

Any advisor that has served clients through the uncertainty and volatility of a prolonged bear market. Have seen a portion of their clients pull fully out of equities to the detriment of their financial plan and long-term financial security. I personally know several individuals that pulled completely out of markets after the 2008 fanatical crisis and never returned. Several of these are clients of mine that have completed a reverse mortgage. They fortunately saw their real estate value rebound and surpass the value they had prior to the 2008 housing bubble. Unfortunately, they did not get the benefit of seeing their stock portfolio fully recover and accede their losses because they sold their equities at or close to the bottom of the market, and were not given.  To add insult to injury, the low interest rate environment that prevailed for more than a decade made investing in instruments like bank CDs basically moot.

Are Your Clients Thinking of Pulling Out of Equities? Consider Pointing Them Toward a Reverse Mortgage.

After thinking of all of my clients that approached me for guidance concerning a reverse mortgage after their retirement resources had languished with little or no return for years. I started to ask myself a question. Would these clients be better off today if they would have leveraged a reverse mortgage during the down years of the economic cycle and held on to their equites in order to see them recover? I believe the answer is yes.

I have been reviewing data from renowned retirement income researcher and author Wade D. Pfau, Ph.D., CFA, RICP(R). Dr. Pfau is the program director of the Retirement Income Certified Professional® designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA. As well, he is a Principal and Director for McLean Asset Management. His data helped me come to my conclusion. He lays out a scenario in his book, Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement (revised for 2022). The section titled, “Reverse Mortgages and the perfect Storm Facing Retirement Income in 2022” contains the following scenario: a client with 1 million invested in 1962 completes a reverse mortgage. The client lets the reverse mortgage line of credit stand by and grow until the market downturn of 1970, 1974 and 1975. In these years, the client runs on the cash flow feature of the reverse mortgage while stopping distributions from their retirement portfolio. By using this strategy, the sequence of return risk would have a portfolio valued at 2.25 million in 1995. The client that stays invested and maintains distributions during these down has a portfolio balance of $0. All of this assumes a 3.95% withdrawal rate from the client’s portfolio.

Reverse Mortgages are Worth a Look for Risk-averse Clients

In closing, all of your clients have heard the following statement through the years. “Don’t panic sell during downturns in the market stay invested! However, we all know that this logic can and does go out the window when the bear is scratching and clawing at the front door. Many of your clients may have been disciplined and or fortunate enough to have put back enough cash to use during down market cycles. I would dare to say that most advisors have just as many or more clients that have not. Many people solely depend upon qualified IRA or 401K account balances that they accumulated in their working years. For these clients I believe the standby line of credit reverse mortgage strategy deserves a hard look.