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For those 62 and older that are planning to stay in their home, obtaining a Home Equity Conversion Mortgage (HECM), more commonly known as a reverse mortgage, through a qualified reverse mortgage broker is all part of a beneficial financial planning strategy.
In many cases, seniors have done some cash flow or retirement planning with a financial planner and understand that there are certain forms of retirement income such as Social Security Income that increase the longer you wait before drawing. Other retirement assets have specific tax benefits for delaying draws. In either case, it makes sense to wait before dipping into these retirement assets, but on a fixed-income in retirement waiting is not always possible. This is why experts are changing the way they view a HECM, and its benefits, making it a key strategy in your retirement planning.
KEY BENEFITS OF A HECM
- As one of the initial uses of a HECM, a borrower’s original mortgage, if one exists, will be paid off in-full, therefore eliminating their monthly mortgage payment and freeing up cash. Clearly a major benefit for a retiree that will be living on a fixed income.
- Proceeds from a HECM can be used fund expenses and stave off drawing on Social Security or other retirement fund accounts. This maximizes the benefit one gets from Social Security, as the later you draw it, the more money you can access.
- Borrowers can establish a growing reverse mortgage line of credit to use when needed. The idea is to use the credit line as a safety net in the event funds are needed when stock portfolios or other assets are down. This way, borrowers can allow their assets to rebound, using the reverse mortgage loan proceeds instead to cover unexpected cash shortfalls. This strategy is often touted by retirement planning professionals.
WHY RETIREMENT EXPERTS SAY A HECM SHOULD BE A FIRST-RESORT OPTION
Wade Pfau, a well-known retirement researcher and professor of Retirement Income at the American College of Financial Services, said studies have proven that using a HECM as a last-resort offers the least benefit.
“For someone who ends up needing HECM as a last resort, they could have surely created more line of credit to help at that point by setting up the HECM earlier on in retirement and letting the line of credit grow until it is needed,” Pfau explained. “This is why last-resort strategies end up looking the worst in financial planning research about reverse mortgages.”
Jamie Hopkins, director of retirement research at Carson Group, said that a proactive strategy is especially important when it comes to home equity.
“One problem with waiting to deploy home equity toward the end of retirement is that home equity grows more slowly than other investable assets in general,” Hopkins explained. “Most homes just keep pace with inflation and provide no real return over it, and many senior-owned homes actually see a decline in value because seniors don’t always keep up with the newest and best home features and remodels.”
Both Pfau and Hopkins say establishing a HECM line of credit earlier in retirement can help a retiree better manage their resources. And, they conclude that even if a senior doesn’t need the immediate cash flow from a reverse mortgage, setting up a HECM reverse mortgage line of credit early on is a sound planning decision.
Before you take your next step into your retirement, you should speak with a HECM expert and your financial planner. To learn more about a HECM and the various ways a HECM can put you on the path to more financial freedom in your retirement contact Silver Leaf Mortgage, your trusted local partner and Colorado’s #1 Reverse Mortgage Broker.
Silver Leaf Mortgage is based in Centennial, CO. They are Colorado’s number 1 reverse mortgage broker and a proud sponsor of Senior Source.
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