Retirees’ Biggest Asset May Be Hiding In Plain Sight

If you are near retirement age and watch even a little TV, you’ve almost certainly seen Henry Winkler or the late Fred Thompson promote reverse mortgages. You may also have heard watchdog groups blast both actors for hawking a complicated product to seniors in need of cash. What you likely haven’t heard is that the reverse mortgage has gotten a substantial makeover since the financial crisis.

Experts now argue that this type of loan can be safe and even wise–as well as a key source of income that homeowners short on savings and planning to stay put should set up the minute they become eligible at age 62. “The strategic use of home equity in a retirement-income plan is the next hot topic,” says Wade Pfau, professor of retirement income at the American College of Financial Services and retirement-research director for an asset-management firm.

About 36% of owner-occupied homes are mortgage-free, according to the Census Bureau. The share jumps to 65% for homes owned by folks ages 65 and older. Many other homeowners have substantial equity. Yet even amid a retirement-income crisis, $12 trillion in home equity just sits there for peace of mind or to preserve a financial legacy. “This is the asset hiding under your nose,” says Shelley Giordano, chair of Security 1 Lending’s Funding Longevity Task Force, which raises awareness about how home equity fits into a retirement plan.

A reverse mortgage is a loan that allows you to turn your home equity into cash. The vast majority of such loans fall under the federal Home Equity Conversion Mortgage (HECM) program, the only ones most people should consider. With HECM loans, you can take the money as a lump sum, monthly payment or line of credit. You must own the home as your primary residence and keep paying insurance and taxes. When you leave, the house gets sold and you or your heirs receive any proceeds beyond the loan balance. This has advantages over a traditional home-equity line of credit. You make no monthly payment out of pocket, and the lender may not cut or close your credit line as long as you adhere to loan terms.

In years past, closing costs might have included a loan-origination fee of $6,000, a gaudy “set-aside” of $6,000 and a few thousand dollars more for the mortgage-insurance premium and other costs. Now set-asides are rare, and if you shop around, you may be able to negotiate away the origination fee altogether, says Giordano.

Some lenders jack up the interest rate to compensate, warns Michael Kitces, director of financial-planning research at Pinnacle Advisory Group. “When I look under the hood, I don’t find costs have come down much,” he says. Michael Foguth, a planner in Howell, Mich., says the loan balance still grows at a compound rate–interest on interest. “I continue to view it as a loan of last resort,” he says.

Still, reforms since the crisis have all but eliminated risky full-draw loans, curtailing the high-pressure sales tactics that often accompanied them. Lenders must perform a financial assessment. There are also new protections for a spouse whose name may not be on the title. In 2014, financial regulator FINRA removed official language calling reverse mortgages a “last resort” option.

But the big breakthrough has been research showing that homeowners who set up a reverse-mortgage line of credit early may in time gain guaranteed access to funds in excess of the value of their house. This is a loophole that almost certainly will be shut down, Pfau says. That’s one reason Kyle Winkfield, a financial planner in Washington, D.C., recommends that homeowners with a potential savings shortfall open a reverse-mortgage line of credit now. “It’s better to have this and not need it than to one day need it and not have it available,” he says.

Homeowners who set up a reverse-mortgage line of credit and do not use it until they run out of other funds have generally stronger results than those who do nothing until other retirement funds are dry. Tapping the equity line only when stocks are down, giving your portfolio a chance to recover, has similar benefits. The next time a silver-haired star urges you consider a reverse mortgage, it may be a sound suggestion.