by Daniel J Turner NMLS#1016716; Geneva Financial LLC NMLS#42056

Copyright 2020 All rights reserved. Use by written authorization only.

In my practice, necessarily ALL of my Clients are at 60+ and older. Therefore, I discuss early in the interview the fact that using home equity through the FHA HECM HELOC (“Reverse Mortgage”) virtually assures them prosperity in retirement due to the capacity of the HELOC to convert equity line growth into guaranteed tax free “tenure” income. To be successful, the HECM HELOC must be started as soon as possible to develop the equity in time for future use. This can also result in substantial growth of the Social Security income by using equity as income to defer SSI to age 70.

It is also critically important to get rid of the mandatory mortgage payment (using the HECM HELOC) and repurpose that into savings as soon as possible. The PAYMENT each month is typically 33% of AGI by using interest rate arbitrage. Looking at a typical mortgage payment as being 25% “P” and 75% “I” the comparable efficiencies are remarkable. 100% of the mortgage payment can be invested into a sinking fund account (FPA, EIA, VA, or other security/risk orientation- (A “wool sock” in a dresser drawer has a better short and intermediate outcome than continuing to make mandatory mortgage payments). In fact, simply making the payment each month into the reverse HELOC would create a dollar-for-dollar HELOC balance that is growing at (currently) 3-3.8% tax free, which is comparable to most fixed annuity accounts and has the added feature of being a federally insured and contractually guaranteed account with immediate liquidity at no cost.

On the other side of this ledger, the build-up of reverse mortgage negative amortization does create a convenient “pocket” depository for the Client to liquidate and pay down the mortgage to protect from “Medicaid Spend down” rules and may be repatriated back to investments after the disabled spouse recovers or passes on.

The point is 30% of income/yr is a LOT of money to save; anything lower than that is a much more palatable suggestion. Converting the mortgage debt to “Non-Recourse” does result in an incredible immediate savings that would not be possible if the old mortgage payment was still in the way. Taking advantage of pretax savings plans which reduce taxes while maximizing contributions, reviewing and implementing new budget efficiencies, extending working years before actually retiring, working part-time until and during retirement.

The fact remains-33% of a retiree’s income is going into a Lender’s pocket for little return when you’re urging a Client to start/continue saving that same sum of money. Elimination of that required payment is like presenting your Borrower with a “Defined Benefit” pension payout, and we (as Planners) cannot continue pretending that making mortgage payments in retirement is rational thinking.