06/17/2016
Many Financial Planners Ignoring Americans’ Most Important Asset

Many Financial Planners Ignoring Americans’ Most Important Asset

New research from the American College of Financial Services shows Americans heading into retirement are unaware of how effective home equity is as a source of income in retirement. Over 1,000 people aged 55-72 with at least $100,000 worth of investable assets and another $100,000 in home equity were surveyed on their opinions and knowledge on housing in retirement with a 10-question true or false quiz.

Surprising Survey Scores

The average score was 48%, and 10% of respondents could not answer a single question correctly. The lack of literacy on reverse mortgages of those near retirement age is not terribly surprising, but somewhat troubling considering home equity is the primary source of wealth for the average 65-year-old American couple. Here are the top three misconceptions about reverse mortgages.

1. Can you owe more than your home is worth?

Just 25% of respondents knew that you don’t need to pay off additional debt if your home goes underwater, as the loan is a nonrecourse loan. The Federal Housing Authority (FHA) insures almost all reverse mortgages under a program called the Home Equity Conversion Mortgage (HECM) program. Under these loans, the FHA pays off any loan balance above the sale price, preventing either the heirs or the homeowner from owing more than the home is worth.

2. When is the best time to use a reverse mortgage?

A mere 27% of respondents knew that a reverse mortgage is better utilized early in retirement as opposed to a last resort near the end of retirement. Research has consistently shown that reverse mortgages can be used strategically to improve a retiree’s financial position, and they provide more benefits when used early in retirement. Reverse mortgages can be used as a bridge to delay the need for Social Security, as a tax planning tool to minimize tax rates, and as a non-market correlated asset to be tapped into when investments are down to reduce sequence of returns risk.

3. At what age can you enter into a reverse mortgage?

Only 38% of respondents knew that 62 years is the earliest age at which a home’s sole owner can enter into a reverse mortgage. This information is important because of the increased benefits of setting up a reverse mortgage as early as possible.

The research showed just 44% of respondents had even considered home equity as an income source in retirement. If that share increases, the resulting boom in reverse mortgages could improve overall retirement security for many Americans.

Many Financial Planners Miss Home Equity Opportunities

Reverse mortgages aren’t for everyone, but consumer misconceptions aren’t the only hurdle in keeping them from being better incorporated into retirement plans. Far too few financial advisors consider home equity as part of a comprehensive retirement plan. A plan is not truly comprehensive if it doesn’t include Americans’ largest asset – home equity.

As more financial advisors utilize home equity planning, more researchers examine strategic uses, and more regulators recognize benefits, the tide will turn on reverse mortgage literacy. Americans currently face severe retirement funding issues, and a better understanding of all financial planning options, including reverse mortgages and use of home equity, will help them to enjoy a more secure retirement.

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