Earlier this year, we ran across an article that we wanted to share again, because we think the premise is still valid. In spite of all its advantages, and an ever more robust set of legal safeguards, there are still millions of homeowners apparently unwilling (or too uninformed) to take advantage of one of the most versatile financial products available: the reverse mortgage.
We got a kick out of the question asked by this article that appeared last spring on the website of CBS News. The article began, “Aging boomers probably remember Rodney Dangerfield as the comedian who lamented, ‘I don’t get no respect.’” Then CBS asks, “Are reverse mortgages the modern equivalent in the retirement planning world?” In other words, is the reverse mortgage the Rodney Dangerfield of Retirement?
We have to agree that it sometimes seems so. Despite the wide availability of the reverse mortgage, also called an HECM or home equity conversion mortgage, the number of eligible homeowners who have taken out these loans is shockingly low – only about two percent. This is in spite of the fact that middle class Americans in the 65-69 year old age group generally have more equity in their homes than they have in other assets combined, according to the Center for Retirement Research at Boston College.
According to the Center for Retirement Research, the majority of retirees will only tap into their home equity when they finally sell their home in order to move – some to a smaller home, some to a retirement home or nursing home, and a surprisingly large number who move to a more expensive house. So why don’t more eligible homeowners explore the power of a reverse mortgage? CBS News says there are two chief reasons: the perception of high upfront costs, and the bad reputation these loans earned in many consumers’ minds when they first came on the market. Some of this negative image stemmed from disreputable lenders who used manipulative tactics to entice borrowers into taking out loans that failed to protect them and their spouses. But new regulations have eliminated much of the risk, and the costs are nowhere near as high as some people think.
The CBS News article cites a book written by retirement expert Wade Pfau, Professor of Retirement Income at The American College in Pennsylvania. In the book, called How to Use Reverse Mortgages to Secure Your Retirement, Pfau deals head-on with many of the biggest misconceptions people have about home equity conversion mortgages. Here are some of the issues where misunderstanding about reverse mortgages is the most persistent.
- High Costs: Pfau says that reverse mortgages do have upfront costs just like any other loan, but competition is driving down some of these costs so shopping around is the best practice. Even with these costs, the power of an HECM to secure your financial freedom makes these loans worth the upfront expense.
- Family Expectations: Some homeowners say they want to pass a debt-free home along to their children, so they are reluctant to consider a reverse mortgage. But Wayne Pfau suggests that careful use of a reverse mortgage can actually increase the legacy passed along to heirs if utilized properly. (This concern about heirs highlights an issue we always emphasize at AgingOptions: the importance of involving your family in your retirement deliberations.)
- Title to the Home: People still seem to think that a reverse mortgage means the title to their home is held by the lender, but this isn’t true. The homeowner retains the title, and the loan need not be repaid until the homeowner moves or passes away.
HECM rule changes in recent years have helped remedy two other issues that used to give reverse mortgages a black eye. In former days desperate borrowers sometimes spent down their home equity far too quickly, leaving themselves in worse financial shape than before, but now the government requires anyone taking out one of these loans to go through a counseling session to make sure they understand what they’re signing up for. Newer rules also limit how much home equity can be tapped and how fast. The other former trouble spot involved non-borrowing spouses who too often found themselves evicted because of the harsh terms of old-style reverse mortgages, a problem which was solved in 2015 with new laws ensuring spousal protection.
If you’re considering a reverse mortgage but need more reasons to say yes, the CBS News article cites several possible uses for an HECM – even though we’re not in full agreement with some of them. For instance, a reverse mortgage can eliminate your house payment, dramatically improving your cash flow in retirement. A reverse mortgage can provide the means to delay Social Security, giving you necessary income while allowing your government benefits to grow significantly. With a reverse mortgage line of credit, you can supplement your income during times when the stock market is in a downturn so you’re not depleting your other retirement funds when their value is low. Finally, one of the main advantages of a reverse mortgage is the freedom from worry that a reverse mortgage line of credit can bring: with this growing credit line in place, the retirement worries that plague many retirees are reduced dramatically.
With all those advantages, is a reverse mortgage right for you? There’s no simple answer to that question, because everyone’s situation is unique. But our view at AgingOptions has always been that the absolute best reasons to take out a reverse mortgage are (a) to upgrade your present home so you can age in place, and (b) to augment other financial sources so you can hire the in-home help you will probably need someday. Because we see the reverse mortgage decision as part of a larger discussion of retirement planning, the other stipulation we would make, says Rajiv Nagaich, is that your family has to be on board. “Before you take out a reverse mortgage,” says Rajiv, “our advice is that you have to have had a family meeting to make absolutely certain your loved ones will support your desire to age in place, and not allow the medical community to convince them otherwise.” We’ll be happy to talk with you about how and when to have that all-important family conference – and the sooner you plan it, the better.
We also urge you to contact us at AgingOptions so we can refer you to a trusted reverse mortgage expert like our frequent radio guest Laura Kiel – someone whose number one goal is not to “sell” you a reverse mortgage but to give you professional objective advice so you can make the right decision.
We can also help you make the right decisions when it comes to all aspects of retirement planning. Is there a way that your financial plan, legal plan, medical plan and housing plan can all fit together? Is there a strategy to make certain your family is supportive of your wishes and has the means to carry them out as you age? The answer is yes, with an AgingOptions LifePlan, the most comprehensive type of retirement plan you’ve ever seen. Find out more by attending one of our free AgingOptions LifePlanning Seminars soon, and bring your retirement-related questions. Click here for information and online registration, or contact us for assistance during the week. We’ll look forward to meeting you soon.
(originally reported at www.cbsnews.com)