Older baby boomers who are strapped for income when they retire could find help right at home, as many seniors are doing now by turning to reverse mortgages.
Currently, with a total of over $3 trillion in home equity, seniors age 62 and over represent a major market for reverse mortgages to fund life insurance and related financial products, says James Mahoney, CEO of Financial Freedom Senior Funding Corporation, Irvine, Cal.
Mahoney, whose company arranges reverse mortgages, says financial advisors can actually help certain clients increase their net worth by using this funding vehicle.
A reverse mortgage is a loan to homeowners age 62 and up that is backed by part of the equity in their home.
Clients often use loan proceeds to provide a stream of retirement income or for other important financial purposes. The most common type of reverse mortgage is the FHA home equity conversion mortgage, which is federally insured.
The top three uses for mortgages provided by Financial Freedom have been to buy long term care insurance, annuities for long-term income, and life insurance for estate planning and wealth transfer, Mahoney says.
With a reverse mortgage, the borrower–not the bank–holds title to the home during the life of the loan, notes the National Reverse Mortgage Lenders Association, Washington. The loan must be repaid when the home is no longer the borrowers principal residence.
“At the time of repayment, the borrower (or their heirs or estate) decide whether to pay off the reverse mortgage and keep the home, or sell the home to pay off the loan,” the NRMLA states. “Any remaining equity goes to the borrower (or their heirs or estate).”
Mahoney notes that financial advisors and their clients often use the funding vehicle to provide tax-free estate benefits, so they can pass assets on to heirs.
“Family-held businesses are not liquid,” he points out. “Buying life insurance with the proceeds from home equity sometimes will actually increase the value of an estate.”
Leveraging an estate with a reverse mortgage reduces the tax burden on the estate, he adds.
“And you can use the proceeds to buy life insurance. You decrease liabilities, assuring greater benefit to heirs. And you have liquidity.”
The reverse mortgage, he adds, is a “great business-building tool for advisors.”
Mahoney says his company has seen “a tremendous amount of activity” from financial advisors using his companys services to help clients.
He bases his estimate of $3 trillion in home equity held by seniors on a combination of data from the U.S. Census Bureau, credit reporting services and other sources.
Financial Freedom, a subsidiary of Lehman Brothers Bank, FSB, New York, has more than a 50% share of the market for this type of mortgage, claims Mahoney.
It has in service over 30,000 loans totaling $2 billion on $5 billion in overall home value, he estimates.
His company has seen a 300% increase in sales volume in the past year, Mahoney estimates. Somewhere between 10% and 20% of the mortgages his company handles have been placed through financial advisors, he adds.
Actual number of clients served by Financial Freedom is from five to 10 times what it was in the same period last year, he adds. In the first six months of this year, his company made 6,000 equity loans, up 80% over the same period in 2002, he reports.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.