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That about to be released study on the “Standby Reverse Mortgage” that we talked about last January can be found in the August, 2012 issue of the Journal of Financial Planning. A link to the report can be found on our website under “News.” This follows another study on reverse mortgages published in the same journal in February of 2012. Reverse mortgages have been around for a while, but in many ways are a new financial product. These two studies are the most extensive we have seen in that they are based on a large number of case studies, and are the only ones to date of which we are aware that address the issue of where a reverse mortgage is appropriate in a financial plan. Neither study suggests using reverse mortgage proceeds for investments, but both recognize that a reverse mortgage can play an important role in a financial plan and can be an important tool in meeting your life goals.

A truism I used to hear when I worked in the world of income tax is “deferral is good,” that is, if there is an option to defer the payment of income taxes and extend the time you can retain possession of and use of your money, in many cases it is a good idea to take it. How does this relate to reverse mortgages?” In a reverse mortgage, there are no monthly mortgage payments to make and the monthly costs that would be paid if you were making monthly payments are added to your mortgage balance. A short form definition of a reverse mortgage is “a mortgage loan with deferred payments.”  So, is deferring mortgage payments through a reverse mortgage a good thing to do? As in the world of income tax, it all depends on your personal situation. At the very least, we can learn more about reverse mortgages by looking at them in this way. In a reverse mortgage you can retain possession and use not only of the total principal amount borrowed, but also of all of the accruing costs, for the life of the loan.

Should we get a reverse mortgage to pay off our regular mortgage? When you replace a regular mortgage  with a reverse mortgage that has no monthly mortgage payments to make, the effect is to eliminate your mortgage payment, and free up that cash for other uses. For example, if there are ten years of $500 monthly payments remaining on a mortgage, eliminating those payments will save the homeowner $6,000 per year and $60,000 over ten years in mortgage payments. When should we do it? We believe that if this is something you want to do, the sooner the better. Once you have decided to eliminate your mortgage payments, each time you write that check can feel like tossing money out the window. If you wait a year, at $500 per month, you will have written checks totaling $6,000, money that you could have retained for future use.  If you are looking to maximize income and minimize expenses in retirement, eliminating those mortgage payments with a reverse mortgage can be a big step in your efforts to accomplish the latter.


A reverse mortgage makes additional cash available and so can always improve cash flow. Eliminating mortgage payments with a reverse mortgage is a classic example.  A couple in their late 60’s had ten years remaining on a mortgage that was costing them $500 per month in mortgage payments. By replacing their conventional mortgage with a reverse mortgage (that requires no monthly mortgage payments) they eliminated that $500 payment and will now be able to use that $500 per month ($60,000 over the next ten years) for other purposes, such as to pay their homeowner insurance and real estate taxes. Of course a reverse mortgage has costs, but those costs are accrued and deferred until the last remaining homeowner sells the home, moves our or dies. And at that time should the balance owed exceed the home value when the house is sold, the shortfall would be covered by the FHA insurance. The point of this example, however, is that by getting a reverse mortgage this couple has freed up for other uses $60,000 that without the reverse mortgage would have gone to mortgage payments.

Another study in the area of financial planning, this one by Barry H. Sacks, J.D., Ph.D., and Stephen R. Sacks, Ph.D. was discussed in the February, 2012 issue of the Journal of Financial Planning.  Without going into a lot of the detail here, this study reverses conventional wisdom and concludes that in many instances not using a reverse mortgage as a “last resort” is likely to result in higher end of life net worth. In reverse mortgage parlance, this study suggests that many homeowners may be able to stay in their homes longer if they get a reverse mortgage sooner rather than later. In the scheme of things, a reverse mortgage is still a relatively new and not fully understood financial product.  For those of us who have worked with and believed in the FHA HECM program for years, it is great to see studies such as this one being undertaken by experts outside of the lending industry. Links to this study and related articles can be found on our website under the “news” tab.

Last time we talked about a presentation on the potential use of reverse mortgages in financial planning made by Dr. John Salter at the National Reverse Mortgage Lenders Association annual meeting in Boston.

As Dr. Salter explained, a financial plan can be described as involving an investment portfolio and a cash reserve fund (CFR). The CFR is the cash available to the investor for day to day expenses, and as it is constantly being used, is a fund that must be regularly replenished from the investment portfolio.

The problem is that when money is needed in the CFR, it may not be the best time to liquidate assets in the investment portfolio.

Enter the “Standby Reverse Mortgage.”

Simply stated, a reverse mortgage line of credit can be a standby source of cash for the CFR at such times when it is not advantageous to liquidate investments. The sneak peak presentation left the strong impression that using a standby reverse mortgage over a period of years can have a significant positive impact on net worth.

As we said last week, it looks like the mainstream use of reverse mortgages in financial planning is about to arrive!

John L Krajsa Jr, Esq., President, NMLS# 139056 is an attorney with a background in mortgage lending and estate planning. Mr. Krajsa has over 25 years of mortgage lending experience and has been working with FHA loans since 1996 and with FHA HECM reverse mortgage loans since 2002. Mr. Krajsa does not offer legal advice but will work with you and your advisors to help determine if a reverse mortgage is right for you. Find out more about AFC Reverse Mortgage and connect with John on Facebook.