Top 3 Reverse Mortgage Strategies for Financial Advisors

by Kent Kopen| Mar 05, 2018 | 0 Comments

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Financial advisors share a common challenge: help clients fund current lifestyle without spending down retirement savings too quickly.


This article covers the top 3 reverse mortgage strategies to help advisors improve the odds that their clients will not outlive their money. Click here to see how much a client can get with a reverse mortgage.



Top 3 Reverse Mortgage Strategies

  1. Reposition debt to eliminate payments and lower portfolio withdrawal rates
  2. Set up an alternate funding source to use during stock market distress
  3. Reverse Purchase Strategy to lower expenses and increase liquid reserves

Many financial advisors are not aware of these strategies because they have reservations about reverse mortgages. More than half admit they don’t understand the product and are not aware of recent government changes that make them safer and more sustainable.


With 10,000 boomers turning 65 every day – most lacking sufficient retirement savings based on increased life expectancy – financial advisors are looking for alternative solutions.


Jamie Hopkins, professor at The American College of Financial Services recently stated…


In my opinion, not including home equity and reverse mortgages in the financial planning process is the largest failure of the financial services profession at this time.”(a)


Some planners have started doing this and others are thinking about it; perhaps because of concerns around the eventual DOL fiduciary rule adoption.


The Reverse Advisor is our educational platform with a mission to help professionals better understand the mechanics, strengths, and limitations of this government-insured product.


The reason these strategies are worth understanding is because: (1) living expenses must be paid somehow - home equity is where the wealth is, and (2) these strategies are effective and efficient.




Before we get into the details, let’s address the elephant in the room. Most people are not receptive to new information that contradicts their current beliefs so let’s first address two common misconceptions about reverse mortgages and then we’ll unpack the three strategies.


Reverse Mortgage Myths & Realities

Two years ago, I surveyed successful financial professionals, including those with CFP, CLU, ChFC, and CPA designations. The results of that research were published in a national magazine called The Reverse Review.(b)


Key findings revealed:

  • Over 50% reported they didn’t know much about reverse mortgages
  • Less than 20% knew someone who had one
  • Only 40% knew that a reverse mortgage could be used to buy a house

Financial professionals familiary with HECMs


We then asked what concerns (legit or not) other advisors might have about reverse mortgages. We posed the question this way so as not to put respondents on the defensive.


Forty-five percent of professionals thought the bank would take the house and their client would lose any remaining equity. Eighteen percent thought the estate was liable if the reverse loan balance exceeded the value of the home. Both of those are misconceptions – they’re not true.


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At the end of a reverse mortgage, the homeowner only owes the bank the current loan balance. There are no early pay-off fess or other back-end surrender charges. All remaining equity goes to the homeowner or their heirs.


If the loan balance is more than the house is worth, the government insurance pays the lender. The borrower, or their estate, are not liable for the difference between the loan balance and the sale price if there’s a shortfall.


The most common reasons cited for exploring a reverse mortgage… increasing retirement income and improving liquidity, especially to cover medical costs or insurance.


The biggest risk around reverse mortgages has little to do with the loan. Unpaid property tax defaults are the issue. Reverse mortgage borrowers are responsible to pay monthly or annual homeowner insurance, HOA dues if applicable, maintenance, and property taxes.


Over the last two years, the government has added more regulations around eligibility to ensure only borrowers who are likely to keep up with property expenses can get a loan. This is news to many advisers who do not realize borrowers now have income and credit qualification requirements.


The bottom line is FHA-insured home equity conversion mortgages, also known as HECMs or reverse mortgages are highly-regulated and very safe. Now let’s talk about the three advisor-specific strategies.



1) Eliminate Monthly Payments to Lower Portfolio Withdrawal Rates


Gerald Wagner, Ph.D., Harvard, and other Ph.D. economists have written extensively on safe withdrawal rates and 4% seems to be the most commonly quoted value. Many of our referrals come from financial professionals.


The most common challenge we hear from our strategic partners is that their underfunded clients are exceeding safe withdrawal rates – they’re pulling out quite a bit more than 4%.


It’s not that clients are trying to be irresponsible, their expenses exceed their retirement income.



  • Average monthly Social Security retirement benefit is $1,329(c)
  • CNN Money reports that the percentage of workers in the private sector whose only retirement account is a defined benefit pension is now 4%, down from 60% in the early 1980s
  • Clients who are relying on CalPERS may soon be under pressure - Steve Westly, former California controller and CalPERS board member, @SteveWestly Feb22 said, “CalPERS is near insolvency itself. It may be reform or bailout soon.”

These changes are forcing planners to consider new approaches and alternatives. The usual budget-busters for retirees are mortgage and credit card payments and/or medical expenses. Home equity conversion mortgages can be used to eliminate monthly debt service, which has the beneficial net effect of increasing free cash flow.


Most advisors realize that the retirement accounts they manage represent the smaller portion of their clients’ net worth. Business Insider reports, for householders over age 65, 84% of their net worth is their home equity.(d)


The solution to inadequate retirement income may come from optimizing home equity. Otherwise the advisor is in an awkward position because:

  • Their modeling and experience tells them some of their clients are heading for a crisis
  • They face reputation and perhaps legal risk if/when a client runs out of money
  • It’s frustrating because as a professional their mission is to help clients avoid insolvency 


2) Alternative Funding Source as a Portfolio Shock Absorber

Many financial advisor partners tell us their clients are vacillating between risk-on and sell. Not surprising with the implicit long-running Central Bank put, followed by recent volatility.


Knowing clients are trying to make up for previous mistakes, how does an advisor help protect gains since March 2009? What happens when we have a real, sustained pull back?


Advisors understand sequence-of-returns risk. Most clients don’t. If clients are mentally benchmarking off today’s values, advisors will have their hands full meeting and managing forward expectations.


Look at a Shiller PE chart. What kind of multiple expansion would be necessary to sustain recent gains for another 10 years? And, most clients have retirement planning horizons longer than ten years.


Stock market PE chart 1880 to 2018


Fortunately, our second strategy addresses the powerful role a reverse mortgage can play in mitigating sequence of returns risk. In simple terms, it allows clients to temporarily fund lifestyle expenses with home equity-based wealth instead of from portfolio distributions.


The Reverse Advisor Monte Carlo Simulation with a Reverse Mortgage

Our website has a Monte Carlo Simulation calculator that analyzes portfolio survivability with and without a Reverse Mortgage. 


You can access it by clicking the For Advisors tab and scrolling down to the Resources section on the left.


Funding retirement during short-term market distress with assets other than those in a portfolio can lead to a positive ‘spending success’ difference (40% vs. 90%) as can be seen from our website calculator.



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Obviously, this isn’t something an advisor's firm would let them show a client but it is rigorous and interesting.


Michael Kitces recently quoted Keynes on why he advocates Monte Carlo analysis: “I’d rather be vaguely right than precisely wrong.”


Whether the above numbers play out exactly, the option to avoid selling temporarily depressed securities to pay for day-to-day expenses is worth considering.



Some advisors think they can accomplish the same 'portfolio shock absorber' approach with a traditional bank home equity line of credit (HELOC). A reverse mortgage line of credit (RMLOC) is a better retirement tool because (1) it cannot be frozen or cancelled and (2) the borrowing limit increases over time without the need to refinance.(e)


To read why a reverse mortgage line of credit is superior in retirement to a conventional HELOC click here to read our thorough analysis.


Theory vs. Reality

Financial planners work diligently to stay along the efficient frontier, find alpha, and maximize portfolio returns. However, their efforts are sometimes undermined by clients’ emotion-based decision making.


On the liability side of the balance sheet, we find people with credit card balances paying 18+% interest. When asked why they carry debt with interest rates that are double or triple their portfolio's return they say they don’t want to use retirement money to pay down debt.


Psychologically, we get it. Personally, I wish advisors had better optics on their clients’ debts and monthly payments. It would allow them to enhance their holistic annual returns by encouraging more rational asset optimiziation.


Our final strategy addresses the unfortunate situation when a retiree runs out of money or is stuck in a home that no longer fits – perhaps it is too expensive, in the wrong neighborhood, not near family or medical facilities, or has an upstairs bed/bath.


What should a client do if they cannot afford their current house and they cannot qualify to buy a different one? Here is a powerful strategy for those with adequate residual income and decent credit.



3) Reverse Purchase Strategy to Lower Expenses and Increase Liquidity


Our Reverse Purchase Strategy has four elements:

  1. Sell a house that no longer fits
  2. Use some of the proceeds, with a reverse mortgage, to buy a home that fits better, without a mortgage payment.(f)
  3. Enlist the help of a professional to invest remaining sales proceeds
  4. Capture available tax advantages



Many seniors and retired people no long qualify for a regular home loan because their income doesn’t fit lenders’ required debt ratios. They then feel ‘stuck’ in the wrong house.


Conventional wisdom suggests when a senior is in the wrong home and cannot qualify to buy a different home, they should sell and rent. We presented a detailed case study that shows the large negative effect of selling and renting in lieu of owning with a reverse mortgage.


Our results were published in a national magazine.(a) Below are three charts that summarize the power of the strategy. For more detail, please request a copy by sending an email to:


This first chart shows the client’s net worth over time as a homeowner and a renter.


Chart of own with a reverse mortgage versus rent


The chart below, Advantage of Owning vs. Renting, shows the delta between the Own and Rent lines above.


Advantage of Owning with a reverse mortgage vs Renting chart


This third chart shows that even though the reverse mortgage loan balance is rising, the equity position is largely protected by appreciation of the underlying asset. Renters don’t have this luxury. Their rent payment goes toward a mortgage, which benefits their landlord not them.

 House Value and Reverse Loan Balance



Buy with a Reverse Mortgage

Most financial professionals don’t know that a reverse mortgage can be used as a purchase money loan. Overly-simplified, the borrower puts half down in cash and gets a reverse mortgage for the other half. The actual percentage will vary by age and interest rate.


The new jumbo reverse mortgage, introduced in March of 2018 will be particularly useful to clients of financial advisors. It allows for loan amounts up to $4 million and it can be used to buy a home with a reverse mortgage; even a condo that is not FHA approved.*


With the Reverse Purchase Strategy, the cash down payment comes from (step 1) the sale of the house that is no longer optimal. Say, for example, someone netted $400,000 from the sale of a house. In most cases, that would not be enough to buy a better home for cash.


Since they don’t qualify for conventional financing, they’d have to rent. But a portion of that $400k, coupled with a reverse mortgage would allow them to buy a place for $500,000 to $700,000 depending on age. Then they might have $100,000 to $200,000 remaining that they could invest.


We acknowledge that some homeowners cannot avail themselves of the Reverse Purchase Strategy because they cannot qualify (not enough equity, income, and/or credit lates). Those friends, relatives, clients are admittedly in a tougher situation.



Taxes & Investing

The Reverse Purchase Strategy doesn’t change a client’s net worth. It repositions wealth and re-balances their asset allocation, making their net worth less susceptible to earthquake risk and lowering monthly payments on the liability side of the balance sheet.


There are some interesting strategies around maximizing income tax deductions and minimizing property taxes with home equity solutions. I wrote two blog posts on these topics.


The Reverse Mortgages and Taxes post has over 20 hyper-linked citations from thought-leaders including: Cornell Law School, the IRS, CPAs, tax attorneys, and other Pd.D. experts. The intention of this post was to provide a single-point, definitive resource to save tax professionals time when researching the latest thinking on reverse mortgage interest deductibility.


Even with the passage of the recent Tax Cuts and Jobs Act, and higher standard deductions, reverse mortgage borrowers will get a sizable 1098 when their loan is paid off. This article explains how to capture and maximize potential deductibility of mortgage interest paid.


Borrowers often ask and then we explain that they don't lose their tax deduction, it's deferred until the interest is paid; vis-à-vis, when the home is sold or the loan is paid off. We also remind them that investment and tax decisions are best made with the direction of competent professionals.


Different states have different rules around property taxes. The Minimize Property Taxes post is a recap and explanation of different CA property tax provisions that can benefit seniors and their heirs. It also has links to Los Angeles, Riverside, Orange County, and statewide resources.


Finally, the Reverse Purchase Strategy has a second-order consequence of helping financial advisors increase AUM (assets under management). It isn’t the purpose or reason for the strategy. Rather, it is a byproduct of the strategy and it helps improve the client’s liquidity, making them better able to weather unexpected financial storms.


To conclude, those who advise clients on managing and protecting wealth may be well served to utilize a home equity conversion mortgage (reverse mortgage) as a financial tool to improve clients’ income in retirement and to reposition wealth, making it more liquid for emergency or lifestyle expenses.


If you’d like to know how much your client might be eligible for, click the button below for a Free Reverse Mortgage Qualification.


The Reverse Advisor Mortgage Qualifier



(a) Financial advisers should avoid error by omission and consider reverse mortgages, Jamie Hopkins, Investment News, Jan 22, 2018

(b) The H4P Strategy, Kent Kopen, The Reverse Review, Nov 2016

(c) Average Retirement Savings by Age: Are You Behind the Curve?  Rebecca Lake, The Balance, 12/15/17

(d) Here’s the average net worth of Americans at every age, Jim Wang, Wallet Hacks, Business Insider, 6/5/17

(e) Only the unused portion of a reverse mortgage line of credit grows at the accrual rate

(f) Borrowers must continue to pay monthly or annual property taxes, home insurance, HOA dues, and general maintenance. No mortgage payment refers to no principal or interest payment


About the Author

Kent Kopen, Certified Reverse Mortgage ProfessionalKent Kopen earned his Reverse Mortgage Specialist credential in March 2007. In 2016 Kent earned the CRMP®, Certified Reverse Mortgage Professional® designation. Mr. Kopen previously worked at Merrill Lynch and Morgan Stanley as a financial advisor and Chartered Retirement Planning Counselor. He provides education, tools, and strategies to professionals who offer financial and legal advice to others. "Our resources help financial advisors, CPAs, and estate planning attorneys help seniors optimize their home equity to provide greater security and peace of mind." 

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