Reversing the Conversation on Reverse Mortgages
As a reverse mortgage specialist, I constantly read the products I sell and what people are saying about them. The other day I was reading an article in a trade publication on how reverse mortgages are a good option for people who “need a source of income” and “are struggling to keep a length of time. ‘advance on their bills’. I must have shaken my head. Never again, I thought.
There was a lot of trouble with the article, but the biggest problem I had with the article was that reverse mortgages were again described as a “loan of last resort”. An even bigger problem is that many people in our industry, as well as many financial planners and real estate agents, still think of reverse mortgages this way.
The truth is, most homeowners would be wise to get a reverse mortgage as soon as they turn 62 and use it to supplement their retirement income. In fact, the widespread use of reverse mortgages can also help prevent what is shaping up to be a retirement disaster of epic proportions in this country. People are living longer and many will not have enough money set aside to retire in their 60s.
According to an October 2020 report from the Center for Retirement Research at Boston College, the median retirement account balance for households aged 55 to 64 was $ 144,000, which would generate just $ 570 in monthly income. According to a 2019 GOBankingRates retirement survey, 64% of Americans will retire with less than $ 10,000 in savings.
Reverse mortgages could go a long way in helping people live more comfortably when they retire and, in fact, could change the way retirement is approached in this county. They can also give loan officers the opportunity to help homeowners so that they can enjoy a better quality of life during their retirement years. However, these opportunities will be missed unless lenders find a way to change the conversation about reverse mortgages.
Myths die hard
Most Americans, and indeed most mortgage professionals, have in mind that the goal of homeownership is to pay off your home. This is a deeply held cultural belief that dates back to the Great Depression and the mortgage festivities that tell us that the goal in life is to be debt free.
Many Americans also view reverse mortgages as something to be avoided at all costs. We have all heard the horror stories about reverse mortgages and how countless widows were evicted from their homes. Certainly, the reverse mortgage industry has, in the past, done a lot to earn this bad reputation.
For a long time, I believed in these things too. I spent most of my early career in the mortgage industry advising my clients to stay away from reverse mortgages. However, in the early 2000s, I went to a reverse mortgage seminar in Miami – basically just to escape the Wisconsin winter – and it changed my life. I have seen that reverse mortgages can play an important role in a borrower’s financial retirement plan.
A reverse mortgage is a federally insured loan that allows homeowners 62 and over to access a portion of their home equity in cash, monthly payments, or as a line of credit. There are several types of reverse mortgages, but the most popular by far is the FHA-insured Home Equity Conversation Mortgage (HECM), which allows borrowers to access between 30% and 75% of the value of their home in based on current interest rates and the borrower’s interest. age. Borrowers can use reverse mortgages to pay for medical bills, travel, or diversify their financial portfolio by investing their home equity in other assets.
The HECM is not a loan of last resort, nor a social assistance program. There are credit requirements and you must prove that you made your last two years of mortgage payments on time. However, the HECM is a non-recourse loan, which means that after the death of the borrower, if the value of the home is less than the loan, no one can claim the difference from the borrower’s estate. However, most of the time there is enough equity left over due to the normal appreciation in home prices. In most cases, with the exception of unusual downturns like the one the market experienced in 2008, the home’s value is rising faster than the negative amortizing interest on the reverse mortgage. In other words, there is usually more equity left over at the end of the loan term than there was when the loan was taken out.
Let’s talk about buckets
I have found that a good way to talk about reverse mortgages is to imagine the average homeowner as having three levels of wealth:
- Bucket # 1: Income
- Bucket # 2: Nest Egg – savings and investments including a 401 (k) or IRA
- Bucket # 3: Home equity
Until retirement, people take money from Bucket # 1, their income, and put it in Buckets # 2 and # 3. If they are good savers, most people put up to 10-20% of their income in compartment 2. However, they put 30-40% of their income in compartment # 3, their home, and often they never consider that equity as cash flow again.
When people retire and Bucket # 1 just goes to Social Security, and maybe part-time income, they go to Bucket # 2. They call their financial planner and start withdrawing money for retirement, which is quite normal. If they are lucky they will have enough money for the rest of their life. But since people live a little longer these days, many will run out of Bucket # 2 before they die.
Recently, researchers have discovered something interesting. They found that it may be better for people to withdraw money from compartment # 3 – their home – as a first resort loan, in the form of a reverse mortgage, and continue to leave the compartment No. 2 grow. For example, research compiled by Wade D. Pfau, Ph.D., professor of retirement income at American College, and published in The Journal of Financial Planning, have found that incorporating a reverse home equity line of credit can help borrowers increase the longevity of their income.
When they really need their retirement savings, they can have higher equity, more cash, and more money to eventually leave with their children.
In fact, Pfau’s research has found that heirs are likely to end up in a better financial position if a reverse mortgage is taken out when their parents start retirement.
Understanding the obstacles
So why aren’t more people taking out a reverse mortgage? Frankly, our industry has handled conversations about them very badly. People are still afraid of getting reverse mortgages because they are afraid of losing their home. Others say they want to give their home to their children, even though more often than not the children don’t want the home.
Another obstacle is fear. People are afraid of what they don’t understand. They know what a 30-year fixed mortgage is and they understand monthly mortgage payments. When they think of reverse mortgages, all they see is their loan balance is increasing. It’s counterintuitive, so it can be hard to understand. People don’t understand that with a reverse mortgage, they can keep making as many or as little payments as they want – it’s completely optional.
Of course, some people shouldn’t be taking out a reverse mortgage. For example, it’s not a good idea if you can’t afford your property taxes. Other people don’t have the right house to retire in: they have a two-story house that was great for raising children, but the maintenance and upkeep costs are too heavy. Still others are not suitable for reverse mortgages because they are what I call “wasters” – they waste all their money. But the majority of homeowners over 62 would make excellent candidates for reverse mortgages, and it’s in their best interest to get one even when they don’t need it.
It is now
One day in the future, reverse mortgages will become a normal and prudent way to help with retirement. To get there, we will all have to do things differently. It’s about making sure everyone in our industry understands the benefits of reverse mortgages and when to recommend them. It’s also about making sure that the partners we work with know this as well, including real estate partners, financial planners and lawyers. The home equity of seniors is one of the largest asset classes in the country, at over $ 8 trillion. Yet, unfortunately, misconceptions and lack of knowledge about reverse mortgages prevent people from accessing them. Tapping into this equity could dramatically change the way retirement is planned for thousands of people.
If you don’t know what reverse mortgages are or how they work, now is the time to learn. Lenders should seriously consider setting up reverse mortgage divisions or partnering with companies specializing in these areas.
We have a long way to go to change the conversation. And with some people, including the media and financial advisers, continuing to spread the fear of reverse mortgages, it won’t be easy. The bottom line is that if we don’t, our children and grandchildren are going to be in real trouble. The looming pension crisis is going to affect everything and everyone, from the national economy to the long-term care industry. We still have 20-30 years to change the conversation, but it can be done. In my opinion, we really have no choice.