The book, Understanding Reverse, was designed to answer the top questions I received as a loan originator and educator. Now that I often find myself speaking to financial planners and realtors, however, I receive questions like:
- “How can home equity be used strategically to fund retirement?
- “How can a home be purchased with a reverse mortgage?
In addition, regulatory changes have altered the conversations. People want to know about non-borrowing spouses, financial assessment guidelines, and life expectancy set asides for property charges. But, the most common question I receive is still:
“Is the Reverse Mortgage REALLY a good deal?”
With a slight tilt of their heads, they skeptically ask this question. The question itself stems from confusion about how the product works and long-standing misconceptions. So, to clear up some of the confusion, I’ll mention the common misconceptions I have addressed in my other blogs and articles:
- No, the bank does not get your home when you get a reverse mortgage.
- No, the reverse mortgage is not just for the desperate and needy.
- No, you can’t owe more than the value of your home.
- No, it is not a government benefit. Funds you borrow become a mortgage lien.
BUT IS IT A GOOD DEAL?
That depends on how you use it. Is a gym membership a good deal? I don’t know. Nobody knows what the future holds. But generally speaking, if you use a gym membership properly, your strength and conditioning will improve. You then have to ask yourself how important this is to you.
One way to tell if a reverse mortgage is a good deal, is to ask those who know the product best if they would get one. It was for this purpose that I wrote the 2014 article titled, “I WANT a Reverse Mortgage When I Turn 62.”
YOU ARE NOT REQUIRED TO BORROW
What most people don’t understand about the prudent use of reverse mortgages is that the homeowners aren’t required to borrow all of their available funds. Unused funds are available in the form of a growing Line-of-Credit (LOC).
In fact, this compounding LOC is one of its greatest financial planning advantages! For this reason, we expect 62 year old homeowners to hold these loans for longer terms. The growing LOC may also be converted to monthly payments later in retirement, which can be used to pay for long-term care if needed.
For example, a financial planning client recently borrowed nothing at closing. The loan balance after closing the loan was the minimum, $100. In his case, the annual cost for this borrower is only $4.00 per year. Then why did he get the reverse mortgage? Because he now has a secure $250,000 LOC that is growing at current interest rates. The LOC will be there in the borrower’s later years, and will grow faster as rates go up.
YOU HAVE THE OPTION TO MAKE PAYMENTS
Many reverse mortgage borrowers “set-it, and forget it.” They assume that the primary benefit is that they no longer need to pay monthly principal and interest payments.
Yes. Monthly principal and interest payments are NOT required. However, this mindset is not always the best financial planning strategy. Making no payments may help from a cash flow standpoint, but the reverse mortgage has a built-in incentive to make periodic prepayments if possible. Here is what happens if you do make payments:
- The loan balance will drop (just LIKE a forward mortgage).
- The LOC will increase (UNLIKE a forward mortgage) with each payment.
For example, I recently advised a client who just turned 62 and is struggling to make his monthly forward mortgage that may be paid off in three years. Using conservative estimates for interest rate changes, I demonstrated that he could:
- Make a slightly reduced payment on a reverse mortgage, and
- Pay down the mortgage in the same time period (3 years), and
- Have the option to skip any payments if needed, and
- Double his LOC in three years because of the LOC growth.
As long as he doesn’t pay below the minimum required loan balance ($100), his LOC keeps growing long into his retirement years! At that point, the LOC will cost him a few dollars per year in interest, but will create a massive emergency fund that is not dependent on the value of the home.
Yes. The reverse mortgage CAN be a REALLY good deal. But it will require the assistance of an informed reverse mortgage professional and ideally, a good Financial Advisor.
I am helping to spearhead an effort to educate the industry and the public on a better understanding of reverse mortgages. That will include the strategic uses of reverse mortgages during retirement. With the help of the National Reverse Mortgage Lender’s Association (NRMLA) and a committee of like-minded experts, we hope the perception of this wonderful product will improve.
If you want to learn more about the strategic use of home equity in retirement, please subscribe to my blog and purchase my book, Understanding Reverse.