Reverse mortgages: the 'fourth leg' on the retirement portfolio stool
This article was produced in partnership with Reverse Mortgage Funding (RMF).
Karen Surca, of Mortgage Professional America, sat down with Christian Mills, head of financial advisor relations with Reverse Mortgage Funding (RMF), to discuss the growing popularity of reverse mortgage options for the older American demographic, and why this mortgage option should be viewed as a key retirement tool.
Once viewed with skepticism, reverse mortgage options are now receiving the attention they deserve. Brokers are also waking up to the realization that among older homeowners reverse mortgages can help to provide ‘another leg’ to the best retirement stool.
This specialized mortgage option has become an attractive option for a demographic that can benefit from looking to other sources of retirement income by tapping into what is often their biggest asset.
While the thought of taking out prized equity from the home may concern some homeowners, access to a reverse mortgage can represent a potential steady stream of income for homeowners who may not want to dip into other retirement fund avenues.
For Christian Mills (pictured), head of financial advisor relations with Reverse Mortgage Funding (RMF), the desire to utilize equity has always been there. However, the lack of understanding surrounding the reverse mortgage product has served to discourage interested borrowers from pursuing this loan option.
“At RMF our focus is working with seniors to help them have a better retirement, and the Home Equity Conversion Mortgage (HECM) is still the lion’s share of reverse mortgages for those 62 years and above,” Mills explained.
“Our proprietary product starts at 55 years of age and can be found in a number of states and is growing,” he added.
“RMF is a leader in the space and in the US, we were one of the first to market with this proprietary product.”
Mills pointed out that with a reverse mortgage “older homeowners can afford to do more things that they wanted to do in retirement. That really is our [RMF’s] mission.”
“It could be letting them sleep better at night because they are not worried about their portfolio and it may help them keep their home or pay for health care costs,” Mills stated.
Reverse mortgages are part of the secondary loan market which is growing in the US. Mills pointed out.
“Being able to use home equity is something that a lot of people actually are doing such as cash-out refinances and things like that. There is no age limit for these secondary mortgages,” Mills said.
“So, it is not a new concept. We are introducing older homeowners to an asset that they may have not thought of,” he added.
“Our philosophy is to do good by doing good.”
Putting your equity in reverse
Every lender in the US that provides for the HECM product uses the exact same formula when calculating the basis of the loan, Mills highlighted.
“A HECM is designed for the older American homeowner, you have to live in your home as your primary residence, you have to be at least 62 and you have to maintain property taxes, general maintenance, and insurance on the home,” Mills summarized.
“Most importantly you have to have sufficient equity. Typically for someone in their 60s, this is going to be about 60% or so equity. [To qualify] you need to demonstrate a bare minimum of 40% equity.”
Mills drew attention to changes in the reverse mortgage space dating back to 2017 when there was a major revision to the principal limit required for a reverse mortgage.
“You can compare the principal limit to a Loan-to Ratio (LTV). They actually lowered the amount of home equity you can tap into, and this made the program more sustainable because we’re much less likely to have people owe more on a reverse mortgage than the home is worth,” Mills detailed.
Along with the change to the principal loan limit, Mills felt that brokers were now more open to the idea of floating the reverse mortgage loan option among their older clients.
“I think it opened up for a lot more people in the financial advisory space to look at the loan option because this is something [viable] they could see in conjunction with a legacy plan,” Mills said.
“Another big thing that has changed is now the max claim amount, which is the amount that we consider the home to be worth, is $970,800. So, it has opened the eyes of a lot of other financial professionals to say, ‘hey, this is not a loan of last resort’ because we are talking about million-dollar homes here.”
Just like any other type of investment option, a reverse mortgage is viewed favorably because of the asset that it is directly tied to: the home, which is considered in financial circles to be a ‘buffer asset’.
“A buffer asset means that you are not drawing from the same source of funds,” Mills stated.
Mills explained that by adding a reliable income stream, other sources of retirement income can be protected.
“Typically, a third of your income should come from some sort of employer-sponsored savings plan, a third from Social Security, and a third from personal savings. If you introduce home equity, you are adding a fourth leg to the stool and if you think about a stool that has three legs versus four legs, four legs are more stable,” Mills detailed.
“It creates a pool of cash; it is a separate bucket.”
Mills also illustrated that reverse mortgages are not tied to the whims of the stock market or other types of investments. Property, in this market, also tends to appreciate.
“People do not have to worry about selling assets at a tremendous loss. If you don’t have to sell those when prices are depressed, because there is a market swing, you can pull the money from the home,” Mills stated.
As Mills pinpointed, now is the time to grab the financial opportunity that reverse mortgage options afford.
“Homes are appreciating much faster than the loan balance itself, so you are growing ‘equity positive’ even with a reverse in there,” he said.
Christian Mills started working in the reverse mortgage industry in 2017 and started his career at Reverse Mortgage Funding (RMF) after he saw their work with financial planners. Prior to RMF, he worked at an apothecary that served assisted living facilities. Because of that, he says he heard the best stories and life experiences from older individuals. Christian has over 20 years of working in retirement savings and income.