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Four Clients That Should NOT Be Considering a Reverse Mortgage

I hope I’ve been clear in my past communications that I do not believe a reverse mortgage is always the best option. There are retirees for whom a reverse mortgage does not make sense. Here are four categories of clients who should be steered away from the program.

Clients who are definitely moving in the near future

Reverse mortgages were developed to help retirees age in place, and while no one can predict the future, it is helpful to at least be planning on staying. Unforeseen health issues or other factors may necessitate your clients moving before they planned to, but the program is optimized when clients remain in the home for the majority of their retirement.

On the other hand, a specialized reverse mortgage program may be a helpful solution for those who plan to move. In 2008, as part of the Housing and Economic Recovery Act (HERA), HUD authorized the HECM for Purchase (H4P). This reverse mortgage allows retirees to purchase a new home with a 50-60% down payment and use the HECM to finance the remainder of the purchase price. Click here to view a sample case study.

Clients who don’t have a need (or strategy) for the reverse mortgage funds

The newly restructured reverse mortgage is designed to help mass affluent retirees increase cash flow, reduce retirement risks, preserve accumulated assets, improve access to capital (liquidity), and add new dollars back into their savings (with the HECM for Purchase). However, not all retirees will need these things; some are already confident in their retirement security/stability and don’t need to augment their income plan.

Clients who would financially struggle to maintain their homes
(even after getting a reverse mortgage)

A reverse mortgage carries four basic responsibilities for the recipients. (1) At least one borrower must live in the home as their principal residence, (2) they must maintain the property, (3) they must pay all property related expenses (taxes, HOA fees, etc.) and (4) they must keep homeowners insurance in force.

For most, these obligations are not onerous. For others, the they can present a hardship, especially for clients with very limited, fixed income. If it may be difficult for the clients to maintain their property taxes and living expenses even after getting a reverse mortgage, then the program would not be a suitable option for them. The truth is that they may become delinquent in their taxes–setting off a series of unfavorable actions initiated by the local municipality.

I cover this in detail in both of by Housing Wealth Guides www.HousingWealthBook.com 

Clients for whom a better option is available

The reverse mortgage option must be weighed against other viable alternatives to discover which better solves a problem, insures a risk or fulfills a prudent desire. Here are the top eight alternatives I have found over the last 20 years.

  1. Sell and Move: This is always my first suggested consideration because it is often the most effective alternative for a successful retirement.
  2. Cash in Other Resources: Sometimes clients have savings, investments, or permanent life insurance from which they’re willing to draw, or they may consider selling or borrowing on a second home to solve the financial challenge. You must weigh the benefits of using all or some of these other resources to meet the need.
  3. Borrow Money from Family: I have found that most children are willing to help their parents, but often are not prepared to provide the amount of money their parents may need for an extended retirement. Furthermore, my clients have been uncomfortable asking their children for this type of help. Would you be comfortable having your children assist you with your retirement income needs?
  4. Refinance: Consider taking out a home equity loan and making payments or refinancing an existing one into a lower payment. This is a good choice for some, but for others, it does not solve the cash flow or savings-erosion problems. The difficulties may be lessened, but the ultimate problem may still persist.
  5. Find a Roommate:  Renting  out  a spare room or finding a senior roommate can often be a good solution. It provides income and companionship when it works well.
  6. Research Local Programs: Some retirees may  be  eligible for local programs that provide essentials. Cash and food assistance, along with home repair or weatherization, are often available to clients who meet the income requirements.
  7. Go Back to Work: Retirees have mixed reactions to this. Some say they’d like to, but no one will hire them. Others say, “Not on your life.” Most are somewhere in between. Regardless of their reaction, part-time work is often a great retirement income supplement.
  8. Do Nothing/Wait: Sometimes waiting or doing nothing  is the most appropriate thing to do. My experience has taught me that in most cases, by the time the HECM conversation comes up, the situation has worsened. I will often ask, “If you don’t make some changes, do you think things will get better or worse?”

Here’s the point. Reverse mortgages, for the right client and when incorporated with other assets, can provide tremendous enhancement to a retirement income plan.

If you have any questions, or would like to have me cover a specific topic, please contact me here.

Fine Tune Your Housing Wealth Conversation

In the Housing Wealth Certificate Course advisors will discover how Housing Wealth incorporates into retirement income planning, how to identify the clients for whom a conversation would be appropriate, and most importantly, how to introduce the subject. To preview the course, please go to www.HousingWealthCourse.com

Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

President and Chief Conversation Starter at HECM Advisors Group/Institute
Don Graves, RICP® is a Retirement Income Certified Professional and one of the Nation’s Leading Educators on the Emerging Role of Reverse Mortgages in Retirement Income Planning. He is president and founder of the HECM Institute for Housing Wealth Studies and an adjunct professor of Retirement Income at The American College of Financial Services. He has helped tens of thousands of Advisors as well as more than 3,000 personal clients since the year 2000
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

Categories: Advisors, General/Misc

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Comments: 4 Responses

  1. Alan Porter says:
    June 19, 2019 at 1:48 pm

    Don, the only thing that I would say is that an affluent client even if they don’t need the money and plan to stay in the house, especially if it is paid for would be making a major financial mistake. The reason I say this is for instance they have 20K in closing cost but 250K in their LOC growing at the same rate. They are giving tax free money away every year that could fund college for grand kids, contribution to a favorite charity among other things. The other thing is the people who have a hard time paying there taxes and insurance are going to have that problem whether they do a reverse mortgage or not.

    Reply
  2. r gomez says:
    July 7, 2019 at 10:56 pm

    Do you offer your book in bulk discounts?

    Reply

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