Harlon Accola is the National Reverse Mortgage Director for Fairway Independent Mortgage Corporation, and reverse mortgages are all he’s done for the last sixteen years. More recently he’s been training other professionals in how reverse mortgages mesh with overall financial planning.
It is true that if you do a reverse mortgage you will lose equity, but it’s not about losing equity, it’s about spending equity. A reverse mortgage is simply a way to get your money back out in a tax free way that you can use to fund your retirement.
You lose equity but you will gain cash. You won’t have to pull that money out of somewhere else, which will allow your investments to continue growing.
Everything is expensive if we don’t understand the value. Reverse mortgages are more expensive than most other mortgages, but that’s because of the protection you get from the mortgage insurance. Everything costs something, no matter where you take out the money you will pay to access it. The question is “does the value justify the cost?”
A reverse mortgage can actually be better for inheritors than other options. If someone gets a reverse mortgage at 62 instead of waiting, they will have more cash flow during their lifetime, they will pay less taxes, they will have a higher net worth, and a bigger legacy to pass on to their children.
What decreases the inheritance to children is long life and spending down assets, not reverse mortgages. By putting that money into a more effective investment, your children will end up better off.
The alternative to living off your home equity during retirement is spending down all your other assets. By using your equity, it gives your investments more time to grow at higher interest rates.
There are a number of new rules that have been put in place to make sure that people don’t end up on the street after taking out a reverse mortgage. The only way to lose your house with a reverse mortgage is if you don’t pay the taxes or stop living in it. Most fears around reverse mortgages are unfounded.
Banks don’t want your house. If you die early, your heirs get whatever equity is left. The bank doesn’t become the owner of the home. If the reverse mortgage goes upside down by the time you die, your heirs won’t owe any extra money. If it doesn’t go upside, your heirs get the difference.
Reverse mortgages are truly tax free, because borrowed money is not taxable. Because you are not selling your house you will not pay tax. Reverse mortgages can not cause a taxation issue, it can only be a tax deduction.
A reverse mortgage is a source of money that isn’t taxable so it makes Roth conversions much easier to calculate and more useful. The majority of Harlon’s clients are mainly affluent and use reverse mortgages to optimize their retirement investments and decrease their taxes.
Many investment advisors say that you can’t use a reverse mortgage to fund an investment product, but that’s not what’s happening here. It’s about using cash flow properly to replace money that is otherwise going to come out of higher cost and taxable accounts.
There is $7.1 trillion sitting in people’s houses. If by working with advisors, we can create liquidity. We can change the way retirement is done in this country.
Everyone is skeptical about reverse mortgages at first, but you should run the numbers to see if your skepticism is valid.