“Being able to recognize the alternate uses of home equity in retirement requires one to take a long-term financial-planning view. Remember, the program was not initially designed as a short-term, quick fix. It was designed for two purposes – a monthly stream of income or a line of credit for future use.”     

– Understanding Reverse

What an odd question to ask. I believe in miracles, but I don’t necessarily believe in karma. I believe in an NCAA football playoff system, but I don’t believe the NCAA acts in the best interest of student athletes. I believe Roger Federer is the greatest tennis player of all time. But asking if I believe in Reverse Mortgages is like asking an English teacher if he/she believes in grammar. They both exist, but they are not properly understood by most people, and therefore misused.

This question, however, has been posed to me many times recently.  I generally don’t mind, because it offers me the opportunity to respond. I wrote the book Understanding Reverse to help educate people and to change perceptions. But I find that the question behind the question is often, “Do you believe Reverse Mortgages are good financial tools?” And the questioner has already formed an opinion.

The best way to respond is to ask what they currently know about Reverse Mortgages. That way I can assess their knowledge. I also find that most people can be classified into three different perspectives: the “Misinformed”, the “Last Resorters”, or the “Strategists”. Let me describe each:

Level #1: The “Misinformed”

A friend recently posted on social media, “Only a fool would get a Reverse Mortgage. It’s a scam.” That is terribly offensive to Reverse Mortgage Professionals commit themselves to act in the best interest of older homeowners. These comments, however, also reflect a level-1 understanding of the product. Their perception, or misperception, is generally skewed by the following THREE COMMON MISCONCEPTIONS:

• The bank gets the home now, or when I die
• I may end up owing more than the value of my home
• My estate will get stuck with a bill for loan balance deficiencies

Of course, we know that the homeowner holds title to the home for the life of the loan, and that the heirs generally have at least four options when the loan matures. In addition, the non-recourse feature states that the homeowner and their heirs will not owe more than the value of the home. They are not stuck with a bill. The FHA insures Reverse Mortgages and offers many generous consumer protections.

Level #2: The “Last Resorters”

A friend of mine was happy to report to me that their financial planner was open to Reverse Mortgages. The planner conceded that “there are times when a Reverse Mortgage may be an appropriate solution.” According to him, the ideal candidate is a homeowner who is house rich, cash poor, with no heirs, and is using it as a “last resort” to stay in their home. My response was “Congratulations. You have a financial planner who is willing to allow a desperate homeowner access to their own money”. That is a very short-sighted view of Home Equity Conversion, and unfortunately, that financial planner is missing the most critical financial planning aspects of the program.

Unfortunately “Last Resorters” have a limited understanding of the product and are influenced by the following THREE ERRONEOUS ASSUMPTIONS:

• Reverse Mortgages are very expensive
• Interest rates are very high
• Reverse Mortgages inherently cause home equity to decrease

Of course we know that the product can be very INEXPENSIVE for homeowners who stay in their homes for longer periods. Interest rates have been extremely LOW on Reverse Mortgages for quite some time. Finally, since initial disbursement limits were implemented, the majority of amortization schedules that I view show the homeowner’s equity INCREASING for many years. This is because interest accrual is projected to be small compared to home value appreciation.

Level #3: The “Strategists”

Individuals with a level-3 understanding of Reverse Mortgages are rare, but are becoming more common with the help of financial planning researchers and their published papers in the Journal of Financial Planning.

“Strategists” believe that the strategic use of home equity in retirement should be considered by all older homeowners as a form of insurance and/or retirement planning. They believe it strongly enough that they obtain Reverse Mortgages for themselves, and recommend them for their friends and their family members as early as they can.

Those with this higher-level understanding of Reverse Mortgages are influenced by the following SIX RELATIVELY UNKNOWN TRUTHS:

• The compounding line-of-credit growth is a powerful retirement planning tool
• Rising interest rates offer future advantages for homeowners using the product wisely
• Making payments toward Reverse Mortgage balances may have positive financial planning implications
• Reverse Mortgages can be used to delay Social Security, thereby increasing your monthly retirement benefit
• Reverse Mortgages can act as a hedge against property value declines
• The “Standby Reverse Mortgage” can extend a retirees assets, making them less likely to run out of money

Yes. I do believe the proper use of Reverse Mortgages should be considered as a part of every older homeowner’s retirement plan. To better understand the strategic uses for reverse mortgages, please subscribe to my blog in the right hand margin.

Dan Hultquist