The press has been favorable to recent reverse mortgage reforms, yet there is still no shortage of articles that offer warnings. I believe those warnings are misplaced, and that other, more legitimate, concerns about reverse mortgages need addressed. The issues we read about are either misunderstood, or have already been addressed by industry reforms.
The media has focused on two primary issues – reverse mortgage costs, and widows losing their homes. Yet, when meeting with professionals who understand the strategic uses of home equity, I find that we share a different set of concerns. But let’s address the media’s concerns before we cover the real issues.
COSTS are not the ISSUE
A media personality once argued that “a borrower could pay as much as $10,000 in fees to get $100,000 in cash. That’s a 10% hit right off the bat.” Yes, that is expensive when the reverse mortgage is only viewed as a request for cash. However, cost becomes a minor issue when the future benefits are properly explained.
Imagine what that journalist would think if I told her “it might make sense to pay the reverse mortgage fees, but NEVER draw another penny.” It sounds ridiculous, until you view the security gained by the transaction. You could pay many times that amount in long-term care insurance that wouldn’t be needed if the reverse mortgage were structured properly.
Is a reverse mortgage expensive if it allows your financial planner to extend your retirement funds several years?
Is a reverse mortgage expensive if your tax planner can manage your adjusted gross income and save you even more in federal income taxes?
It’s getting harder to make a case that reverse mortgages are expensive. The costs are commensurate with traditional mortgage fees, and when used properly, the financial planning advantages are huge. The interest rates are favorable, reducing the long-term costs, and the non-recourse feature protects the homeowner from ever owing more than the value of the home.
WIDOWS are also not the ISSUE
The reverse mortgage program is now very favorable to non-borrowing spouses who wish to remain in the home after the last borrower dies. Yet, even before recent reforms, this issue was misunderstood. There is a big difference between “occupying” a home and “owning” a home. When someone is facing “foreclosure”, it is important to know whether they are actually on title. In the media-highlighted cases, the widows were not actually owners of their homes. Therefore, the phrase “widows faced foreclosure on their homes” is misleading.
However, additional consumer protections for non-borrowing spouses became effective August 2014, allowing eligible non-owner widows and widowers to remain in their homes following the death of their spouse. The guidelines were revised again this year to give lenders additional options for handling non-borrowing spouses. As a result, it has become unlikely that these occupants would be displaced.
The concerns financial planners and loan originators have about reverse mortgages are not about the product itself. The concerns are about the people who have access to the funds – the homeowner and their “trusted” advisors.
- Financial planning concern
Respectable loan originators and financial planners want the homeowner’s funds to last. Homeowners generally have access to 60% of their principal limit within the first year, minus closing costs and lien payoffs. This is called their “initial disbursement limit.” After the first year, homeowners may then access the additional 40% plus growth.
The limits placed on first year disbursements have helped this issue. However, there is a growing bucket of money to draw from, and many homeowners are consuming the funds too quickly. The homeowner must set boundaries if the reverse mortgage is to be used for emergencies, insurance, and/or future retirement income.
- Elder financial abuse concern
As reverse mortgage professionals, we convert home equity into accessible funds. However, we have little control over “trusted” advisors who are not so trustworthy. Their influence over the homeowner can quickly turn into elder financial abuse.
According to the National Committee for the Prevention of Elder Abuse (NCPEA), the perpetrators of elder financial abuse are often “family members, including sons, daughters, grandchildren, or spouses.” Some of them have “substance abuse, gambling, or financial problems.”
Heirs also frequently feel a sense of entitlement – that their parents “owe” them an inheritance. They rationalize that it’s not “stealing” funds when they feel the funds are rightfully theirs.
Yes, there are costs. And reforms to the program were needed, adding security for non-borrowing spouses. However, the sad truth is that reverse mortgage funds are not always used properly. That is the real concern.
If a homeowner has a monthly cash flow issue, then establishing monthly payouts from the reverse mortgage can cover monthly cash short-falls. If a homeowner is using a growing line of credit for financial planning purposes, then consulting a financial advisor that has a fiduciary responsibility to act in the best interest of the homeowner would help.
When the real issues are fully understood and communicated, the reverse mortgage will be what it was designed to be – a prudent and sustainable solution for older homeowners to remain in their homes.
If you want to learn more about the strategic use of home equity in retirement, subscribe to my blog and purchase my book, Understanding Reverse.