My friend and colleague, Jamie Hopkins, Esq., is passionate about retirement security and believes that a better prepared public can enjoy a more secure and fulfilling retirement. Part of that preparation is becoming aware of all available retirement income planning options–one of them being reverse mortgages.
The reverse mortgage often receives bad press due to misinformation and outdated concerns–keeping many advisors from completing their due diligence on the topic. In his recent article, Busting Three Half-Truths About Reverse Mortgages, Jamie highlights three commonly held misconceptions about reverse mortgages and explains why it may be beneficial for advisors to take a second look. Below are some of the highlights from the article.
From Busting Three Half-Truths About Reverse Mortgages
The Majority of Americans Don’t Understand Reverse Mortgages
A few years back, I conducted and published research in the Journal of Financial Planning that showed Americans don’t understand reverse mortgages. One possible explanation for the poor performance is a lot of misinformation floating about. A recent USA Today article titled “Considering reverse mortgages? Better to reverse course on this risky course” confirms my belief. The article contains many half-truths and misunderstandings and projects a negative connotation of reverse mortgages onto the reader.
Half-truth #1: Reverse mortgages are high-interest-rate loans
Are there expenses with reverse mortgages? Absolutely. Are they high-interest rate loans? Not exactly. For the most part, reverse mortgages keep in line with traditional mortgage rates. In some instances, they can be lower for seniors as reverse mortgage rates aren’t as subject to income requirements and credit scores as traditional loans.
And sure, reverse mortgages do have additional costs – payment into the FHA insurance fund – that not all forward mortgages have. But this payment offers up a product feature other loans don’t – the ability to not make money payments and never owe more than the value of the house on the loan. So yes, there’s an additional cost, but for an additional feature.
Half-truth #2: Reverse mortgages are too expensive
Reverse mortgages can absolutely be too expensive for the solution a client needs with closing costs, insurance premium and interest owed. However, like any product, you need to review its value and not just look at the dollar amount. A new Lexus costs more than a 15-year-old KIA. That doesn’t mean one vehicle is better or worse based on price alone. You need to attach the price to its value and compare. This is similar with financial products. Reverse mortgages under the HECM program have features that are unique when compared to traditional mortgages, like the non-recourse aspect of the loan and that while the borrower lives in the home, there is no requirement to make monthly mortgage payments.
Two Resources for Advisors and Their Clients: www.HousingWealthBook.com
Half-truth #3: Reverse mortgages aren’t a long-term solution
Another half-truth about reverse mortgages is that if you live a long time, reverse mortgages aren’t a good solution. It is true that your compounding interest balloons the longer you live and carry your debt. However, one big thing the article failed to mention is that reverse mortgages are required by law to be non-recourse loans. Once you die, your estate would not be responsible for any amount above the value of your home. This means that you only owe up to the value of the loan amount due or the home value.
The USA Today article mentioned a scenario of how a reverse mortgage debt could grow substantially over time. The article basically laid out an example of owing $1.5 million on a loan with a principal borrowing amount of $700,000. However, the article made no mention of the non-recourse aspect. So if the borrower had a home that ends up being worth $700,000, you can’t owe more than the value of the home with a reverse mortgage. So while there is a substantial cost with compounding debt interest on a loan, this is limited to a degree because of the non-recourse aspect of reverse mortgages. And furthermore, if you end up borrowing more money than your home is worth through the course of the loan, you made a smart financial decision, not a bad decision. You got more out of the loan than your home was worth.
Do Your Homework
Like any retirement income strategy, reverse mortgages need to be researched, reviewed and considered beforehand. Don’t base your opinion on just one source. Reverse mortgages aren’t appropriate for everyone, as they come with costs and risks, but you might have the ideal situation.
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Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
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I like Jamie Hopkins and generally find his advice helpful. But this article uses the same answer to try to rebutt each of the 3 myths.
I don’t agree that these are myths – although it does make a catchy headline
It seems his only argument is that the loans are non-recourse.
That’s great, but the loans are expensive – particularly after the revised pricing of a couple years ago and the lower upfront amounts that can be borrowed.
They are in general high-interest.
And if you hold them a long time, the accumulated debt can be terrifying. Try explaining to grandma when she is 95 that her loan is twice the value of her home, but don’t worry, it’s non-recourse.
Matt, be sure and read Jamies full article and not just the excerpts. Nevertheless, after spending 20 years only doing HECM’s I would certainly agree that they are not the best solution for some boomers. A Housing Wealth Strategy should accomplish 3 things. It must either: Solve a problem, Insure a risk, meet a desire, i submit in that order. There are a lot of things to try to explain to a 95 year old retiree (or their heirs) and having had 3,000 clients I know of what i speak. The one conversation I’ve had most is:”Thank you, mom was able to take very limited retirement savings and income and live in her house the last 20 years…” I sometimes ask kids who are concerned “Would you rather mom leave you the apple tree or the Orchard?” Housing Wealth Strategies can accomplish more that most people have ever researched or imagined. But they are certainly not for everyone. http://www.HousingWealthBook.com