2 minute read
The reverse mortgage industry has historically focused on the needs-based borrower, but affluent individuals have the means to approach the homebuying process differently through the strategic use of a home equity conversion mortgage. This group is represented mostly by people at or near retirement age, those who are entering a new phase in life and, in many cases, seeking to relocate to warmer climates. In this scenario, it is not uncommon for the homeowner to sell their existing home and begin searching for a new place to live.
With a higher-than-average amount of liquid assets, many of these prospective homeowners are more than willing to pay cash for their new real estate. For instance, suppose someone with $1 million in cash is looking to purchase a second home for $500,000. In many cases, the purchase will be made in full. Alternatively, a large down payment will be made, and the remaining balance paid off in a very short time. While it still holds true that buying a home is a good investment, affluent homebuyers handle money a bit differently than others. High-net-worth individuals are very effective at using cash strategically to generate additional income. However, if a significant portion of cash is used to purchase a home outright, that money is unable to earn the affluent homebuyer anything. In the aforementioned scenario, the homebuyer is surrendering half of the existing cash flow that could instead be secured and leveraged to strengthen a retirement plan.
It is for this reason that HECMs should be discussed more frequently when consulting with affluent homebuyers. There is tremendous potential to be realized: According to Pew Research, more than 10,000 baby boomers are turning 65 years old in the United States every day. In addition, 65 percent of people 65 years and older own their homes outright, representing more than $4 trillion in equity, according to the NRMLA/RiskSpan Reverse Mortgage Market Index, a quarterly measure that analyzes trends in home values.
As industry professionals know, a HECM provides homeowners access to the equity in their current home, which can be leveraged in the purchase of a new home. For affluent buyers, this frees up liquid assets that would otherwise be tied to a large down payment or an outright purchase, and enables them to integrate those assets into their retirement plans. So what is the problem?
Despite being a great tool for affluent buyers, HECMs have a historically bad reputation. Poor practices and a lack of oversight in the past have created mistrust among baby boomers. Our role as mortgage professionals is to clear the air and communicate the importance of a HECM so that high-net-worth borrowers can enjoy homeownership while maximizing the value of their retirement investment portfolios.
