It doesn’t matter the relationship – communication is key. Without it, understanding can break down and if you are helping to manage someone’s money, then this can end in disaster. As such, every adviser not only needs to be up-to-date on financial planning tools but also needs to know how to communicate these tools their clients.
One of the biggest tools advisers are relying on today is the reverse mortgage. These mortgages allow borrow to access the equity they have built up in their homes without needing to make monthly payments. However, this is not free money and reverse mortgages are not for everyone. As such, here is a quick overview of what every advisor should know about reverse mortgages.
- Lenders are Talking to Your Clients
Let’s face facts, reverse mortgage lenders are busy talking to your clients. While you don’t need to be privy to each discussion, you do need to have an idea of what will be discussed. This starts by familiarizing yourself with what a reverse mortgage is and, importantly, how it is presented to potential borrowers.
Start by finding out who are the lenders in your area, so you will have a good idea of who your client will be talking to. For example, if you live in Arizona, then you will want to check out these lenders.
- Understand the Trends
A big reason for the explosion in reverse mortgage activity is that more and more seniors have few options to pay for their retirement. According to information from the National Reverse Mortgage Lenders Association, seniors in the U.S. currently hold close to $6 trillion in home equity. That is a really big number and if this home equity was a country onto itself, then it would be the fourth-largest economy in the world.
Where this gets interesting is that the same study found that many Americans between the age of 55 and 62 had little or no assets beyond their homes. To put this in simple terms – these Americans are not prepared for retirement.
Many people this age know it as well. As such, they are less likely to have regular conversations with a financial adviser or to even look at their savings or other accounts at all. Denial isn’t just a river in Egypt and this is where advisers need to take a more active role.
First, by showing near-retirees that there are options. And second, by helping to put them into action. After all, your expertise should help ease the worries of your clients.
- Understand the Markets
Markets are irrational, this is a well-documented fact. However, the real challenge is how to take this data point and turn it into an advantage for your clients. One obvious answer is to consider fixed income investments which can provide regular returns over time.
Another answer is to look at way to reduce monthly obligations – such as mortgage payments. Furthermore, these options should help to take away some of the uncertainty in retirement. This could include securing revenue streams to pay for a longer, more active life and having the funds available to pay for long-term care.
While there are several options (e.g. long-term care insurance, annuities, etc.), one option which shouldn’t be overlooked is a reverse mortgage as these loans could provide the capital required to purchase additional coverage.
Ultimately, this comes down to looking at the risk inherent in each option and then helping your client to decide which option best suits their needs today and tomorrow.
- Repaying a Reverse Mortgage
Given the nature of a reverse mortgage – you get the money today and pay it back in the future – repaying the loan rarely comes into the equation and this is a shame. In fact, this is one of the most valuable pieces of advice that a financial adviser can offer a client who is considering such a loan.
Besides selling the home to repay the loan when it comes due, other options can include taking out a life insurance policy or ensuring that the heirs have access to the capital needed to repay the loan – assuming the decision is to keep the home in the family.
In the end, a reverse mortgage is about converting an illiquid asset (a home) into a liquid asset (cash) without the burden of making a monthly mortgage payment. However, this tool is not the right fit for everyone and it is the role of the financial adviser to take the lead in these conversations with their clients.