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Commentary: For financial advisors, home equity is an ‘idea whose time has come’

Reverse mortgage industry manager Paul Donohue offers thoughts on why home equity lending, and reverse mortgages, should have greater consideration from financial planners

At a wealth advisors conference with one of the most admired thought leaders in the financial services world, a statement was made that profoundly shifted the understanding of how money works for those listening. 

There were over one thousand knowledgeable Financial Advisors in the room that day when Don Blanton, founder of the “Circle of Wealth” community, took the stage and said this:

“You finance everything you buy.”

You could hear a pin drop in that enormous room. Then he smiled and explained that this is one financial principle that determines your financial destiny, and dictates how everyone you know lives in today’s economic reality.

“Cash is a leverageable asset,” he said. “It’s a tool that feeds your family, keeps a roof over your head and determines your lifestyle. When we buy anything, we finance that purchase either with our own money, or we use someone else’s money. Either way, every purchase is financed.”

Why cash allocation is king

When you buy a car with $40,000 in cash, you are financing the car with your money, from your own banked cash reserves. When you do this, you are acting as the bank at the cost of the lost opportunity that $40,000 and its potential in the market has, now and over time.

When you finance that car for seven years with the bank’s money, you retain the $40,000 in cash and all of its potential over the next seven years. When you do this, the cost to you is 84 payments of approximately $600.00. Whatever you buy, you either finance it with your money or with someone else’s.

Paul Donohue, Mid-Atlantic area manager for Mutual of Omaha Mortgage.
Paul Donohue

When purchasing a home, the stakes are much higher, and the long-term consequences of how you finance it are significantly more profound.

In my 35 years of financing homes, the single biggest mistake I have seen people make is not putting enough thought into how best to pay for that new home. For baby boomer homebuyers and people in retirement, the impact of a bad home finance decision can have dire long-term consequences.

These include running out of money at the time they’re most vulnerable; having inadequate cash flow to meet the rising costs of living; living without a buffer account to meet unexpected expenses; and living in fear and stress because of poor and misinformed cash planning.

The decisions people make in their 60s and 70s about how best to leverage home equity and liability management will significantly impact their financial security in their 80s and 90s. As industry professionals who advise families on how best to meet the financial challenges people face as they age, we must do a more thorough job of analyzing the illiquid equity sitting idle in the home.

Home equity is the idea, and the time is now

Housing is the largest and most personal asset they own and is often the largest expense through retirement.

“Nothing is more powerful than an idea whose time has come,” Victor Hugo once said.

When applied to the use of home equity in the retirement income planning process, this powerful concept represents more than a shift in the battlefield of ideas, as time is no longer our ally. It’s a new arena of collaborating minds rethinking entrenched, outdated practices.

Collective home equity for those 62 and older has climbed to $12.39 trillion. This fortress of housing wealth has become a financial barricade that threatens the financial security of this country and the clients we serve. Today it’s paramount that every financial advisor offering retirement solutions have a Home Equity Conversion Mortgage (HECM) specialist they trust to call on.

One who has a seat at your table of experts, and who can help demonstrate how best to leverage housing wealth by safely converting home equity into cash.

Using home equity must become part of a comprehensive plan to protect and extend the life of the portfolio, increase monthly cash flow to deal with the rising costs of living, and to provide a “buffer” account of cash in order to manage unexpected costs.

Retirement realities

Reverse mortgage professionals all recognize that this country is on the front edge of a retirement crisis the likes of which we have never seen before. Being a part of the solution or part of the problem is a choice we consciously make. We can no longer afford to look the other way and allow clients to carry a mortgage payment into retirement, or worse yet, ignore the consequences while they sit on hundreds of thousands of dollars of untapped home equity.

Home equity, when leveraged prudently in coordination with a comprehensive retirement income plan, can dramatically change the future security of those people you serve. The clients you care about are counting on you to provide them with the best advice you can so they can retire with confidence, knowing they are utilizing all the assets they worked so hard to create for themselves.

It is the advisor’s responsibility to become comfortable discussing all matters of housing in retirement planning, and it is now vital to include home equity conversion as an essential component of a secure and confident future.

 This is a critical idea, and its time has come.

This column does not necessarily reflect the opinion of Reverse Mortgage Daily and its owners.

To contact the author of this story: Paul Donohue at pdonohue@mutualmortgage.com
To contact the editor responsible for this story: Chris Clow at chris@hwmedia.com

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