If you’re trying to cut a board in half, a hammer is a terrible tool. This analogy applies to most financial products or strategies – the pros and cons depend on the context.
Below you’ll learn that many professionals who offer opinions do so without complete knowledge and we'll explore the reasons (context) people consider reverse mortgages; how and when are they a good fit... or not.
The Advantages and Disadvantages of a Reverse Mortgage
Most decisions go through three phases:
- Awareness – where we do research to better understand our problem or opportunity
- Consideration – where we try to get our arms around various approaches or methods
- Decision – who or what will help us solve our problem or maximize our opportunity
Those considering a reverse mortgage usually need or want more cash, income, or reserves. Their reasons span the spectrum from survival, to longevity insurance (not running out of money if they live longer than expected), to sophisticated tax reduction strategies (like capturing the step-up-in-basis of highly appreciated real estate by not selling prematurely).
One of the most frustrating things about working through the awareness and consideration stages is when you get differing, conflicting opinions. Especially if the cost of being wrong is high. That tends to paralyze us. The following story explains why you’re having trouble getting a clear picture. Hint, it has to do with people who don’t know what they’re talking about.
Some professionals just don’t know
Last year I was asked to write an article for The Reverse Review, a widely-read industry trade magazine. The theme of my article was on educating financial, insurance, and legal professionals on reverse mortgages. Taking a cue from Steven Covey, I approached the writing by ‘seeking first to understand, then to be understood.’ I wanted to see where they were coming from; what did they know or believe.
To do that I designed a questionnaire that was sent to 236 professionals. These were highly educated people; specialists in their field including CPAs, PhDs, CFPs, etc. If anything, the questions were worded in a way that would make it easier for the respondent to have a bias against rather than toward the product. That was on purpose so the survey wouldn’t come across as a sales pitch.
The big Ah ha from the project reminded me of a Mark Twain quote:
“What gets us into trouble is not what we don’t know.
It’s what we know for sure that just ain’t so.”
Here are some examples of questions whose answers revealed how widely misunderstood reverse mortgages are. Remember, the participants are experts in their fields.
How familiar are you with reverse mortgages?
Get the concept, don’t know the details – 47%
Don’t know much about them – 6%
Can different lenders charge different fees for the same reverse mortgage?
I don’t know – 66% (they can)
No, fees are mandated by HUD/FHA – 19% (they're not)
Can a reverse mortgage be used to purchase a home?
I don’t know – 39% (yes, to learn how click here)
No – 21%
More quotes from financial professionals...
These results were as eye-opening to me as they were to the editor of the magazine. They also validated my team’s mission of wanting to educate homeowners and professionals on strategies to help seniors overcome the struggle of not having enough cash or income.
With so much misinformation out there, people who could improve their circumstances weren't doing so because they felt paralyzed.
Reasons People Consider Reverse Mortgages
Here are the percentages of professionals who indicated that the following were reasons they would recommend a client consider a reverse mortgage:
- Monthly income for as long as home is primary residence – 68%
- Eliminate current mortgage payment – 61%
- Make retirement savings last longer – 52%
- Support aging-in-place expenses, like caregiving and home modifications – 47%
- Medical or dental expenses or to pay for additional health insurance – 37%
- Home improvement – 21%
- Social Security maximizer – delay benefit start date to get more later – 19%
- Protect spouse when decedent’s pension or Social Security income stops – 18%
- Protect investment accounts during market downturns – 16%
- Early inheritance strategy – minimize future conflicts – 13%
- No mortgage payment purchase on home that better fits needs – 11%
- Help others with college, start a business, or buy a home – 10%
The list above addresses why people consider getting a reverse mortgage. The pros or advantages of using a reverse mortgage to generate more cash, income, or reserves includes:
- No monthly payment on borrowed money
- Proceeds are tax-free
- Non-recourse loan – borrower doesn't pay difference if balance exceeds equity
- Interest rate is lower than revolving debt and other alternatives
- Preserves mortgage interest tax deduction– it’s paid at the end
- No prepayment penalty
- Monthly income continues no matter how long you live
- Monthly income continues even when loan balance is more than house value
- Borrowing power of unused line of credit grows – guaranteed
- No interest expense for unused line of credit – don’t pay for money not borrowed
- Heirs have 6-12 months to sell the home – without having to make a mortgage payment
- Home’s equity goes to heirs, not the bank, at the end, when the home is sold
- Can use to buy a home and not have a mortgage payment
- Can be used as a wealth planning tool to maximize other investments and Social Security
- FHA insurance protects income or access to line of credit if lender goes out of business
One of America’s biggest challenges is demographic – bridging the gap between longer lifespans and insufficient retirement savings. What a reverse mortgage does is increase the quality of life by safely allowing homeowners with equity to access some of their wealth.
The drawbacks or cons to reverse mortgages are these:
- Home cannot be converted into rental property unless reverse is refinanced or paid off
- They can be expensive if you get one from the wrong lender
- All homeowners under 62 years of age must come off title
- They involve a lot of paperwork and they can take months to get
The biggest legitimate disadvantage or con I see involves the cost of getting a reverse mortgage, relative to how long someone is going have that mortgage. Paying fees for or investing in a reverse mortgage may not make sense if someone is only going to be in the home for a short time.
It’s true, some reverse lenders charge more than others and the home owner doesn’t receive extra value for the difference. Hiring famous actors and paying for television commercials isn’t cheap. When you get to the decision stage, it does matter who you work with – both in terms of cost and time.
After people learn that reverse mortgages are not inherently flawed; that they’re in fact safe and reasonable, their biggest struggle is facing the fact that a reverse mortgage doesn’t create wealth. It cannot make up for money we didn’t earn or save when we were younger. What it can do is allow access to wealth that is otherwise trapped in the home, without requiring selling or leaving the home.
In a future article, we’ll cover how to shop for your lender and what questions you should ask. If you’d like a complimentary consultation to learn about that now, please click here or the button below.
About the Author
Kent Kopen earned the Certified Reverse Mortgage Professional in 2016. Previously her received a Reverse Mortgage Specialist designation in March 2007. Mr. Kopen is a proud members of NRMLA (National Reverse Mortgage Lenders Association). Kent provides tools on his website: theReverseAdvisor.com, and offers strategies to professionals in other fields who offer financial advice to the public. "Our resources are designed to help financial advisors, CPAs, estate planning attorneys, and insurance professionals help seniors optimize their home equity to provide greater security, peace of mind, and lifestyle."