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Retirees will face tough decisions with reverse mortgages

But recent changes to reverse mortgages mean seniors and their families may have tougher decisions to make. Borrowers can take payouts as lump sums, monthly checks or through a line of credit that can be tapped at will. The reverse mortgage debt grows over time, typically at variable interest rates, and may deplete all the equity in the home, leaving nothing for heirs. If the home is worth less than the reverse mortgage balance, though, borrowers and their heirs can’t be held responsible for that loss. The loans earned a bad reputation as commission-hungry salespeople preyed on seniors who didn’t understand the loans’ complexities or who had financial problems so severe that they quickly burned through the money. Costs fell enough that fee-only financial planners who traditionally had shunned these loans started to recommend them to wealthier clients as a portfolio protection strategy. “For a reasonably affluent client that has a $300,000 or $500,000 house, that’s $6,000 to $10,000 of upfront costs just in case you might ever need the line of credit,” Kitces says. “It’s just too much of a mental upfront hurdle for most clients.” Even before reverse mortgages became more expensive, the Consumer Financial Protection Bureau warned last year against another strategy that some financial advisers were promoting: using the loans to delay claiming Social Security. Those borrowers actually benefited from some of the changes, which included a reduction in annual insurance premiums on borrowed amounts. Kristi Sullivan, a certified financial planner in Denver, says she now talks to clients more often about reverse mortgages and the potential uses of home equity in retirement.