Issue 17.14
It is crazy to hear all of the misinformation that is out there today in the news. So many clients get “advice” from neighbor’s friends or advisors that tell them how “bad” a reverse mortgage is for them? They can’t tell the client’s why it is bad – just that it is in some way.
“I heard that if one of the spouses die, the other has to sell the home or the “government” owns the home at that point. Or, when both spouses die, the kids or heirs just hand over the house to the bank or FHA, no matter if they have only been in the home for a short time.” Or, “I know a homeowner who died and their kids had to end up paying a great amount for the home when the parents died and it cost the kids most of the kids savings and was a disaster for the heirs.”
Wow. It really amazes me the misinformation that is out there today. All totally untrue, of course, or the loan would never make sense if any of the above could happen.
First, let me start with this: The reverse mortgage today or HECM loan that is so popular today is one of the most regulated loans in the country – if not the most regulated – period. Second, after over a thousand loans that we have funded over the past six years, we have simply never had a client come in and say, “I wish I would have done something different.” No one has ever refinanced out of the reverse loan into a conventional loan or changed their loan terms back to a conventional loan – ever with us. Finally, my father is in the same loan. That was a five minute discussion. Should he make payments on his mortgage for the rest of his life, so five of us kids have more equity to split up in a home in the future – when it costs my dad’s fixed income to make those payments year after year? How is that ever going to help him during his retirement? It would allow us heirs more money or equity to split up after he passes, but it would also cost him hundreds of thousands in house payments over his life that he would not have to make. That should be a five minute decision. And, it was.
So, here are some thoughts the next time you hear what is wrong with a reverse loan and not what is right with a reverse loan today. Because you never hear the good things, only the bad rumors – right?
1. If you are over 62 and you’re going to buy a home, you can pay cash, make a mortgage payment for life and or use the reverse purchase and pay half the price and never make a mortgage payment again. So, if you can pay cash and never worry about out running your retirement, then you are in a lucky situation and pay cash for the home if it makes sense. If not, and you’re trying to decide whether or not to make a conventional loan or a reverse purchase – just run the comparisons side by side and see how much of your retirement you will end up dumping into mortgage payments over your life.
2. Same applies for a home that you are already in. If you are making mortgage payments for the rest of your life, then you need to answer the question – why? Why are you using your retirement income and or investments to make a mortgage payment on a home that will never benefit you and your wife? There will be more equity in the home for the kids when you pass, but it will never benefit you and your wife.
3. How about using the mortgage when your investments are down. If they drop in value and you are pulling from them or using the income and cashing in during a low market, you are doubling up the adverse, because you are not only pulling from your investments to make a mortgage payment, but you are pulling from them in a down market.
4. How about those that cash in retirement funds or IRA’s to pay cash for a home? Who is giving them the advice? You take out $250,000 from your investment account to pay cash for a home and then you have to pay taxes on that 250K? Who is giving you financial advice? I don’t care if you have a reverse loan for the rest of your life or just for five years. There are better ways to strategize with taxes with this loan then the above scenario.
5. Finally, the biggest and most common is the scenario where you and your wife are fine income wise to make a mortgage payment. But, if something happened to you and you passed, can your wife still make that mortgage payment with less income. You will most certainly lose some social security income when you pass and most likely some pension and or annuity, so can she still make that payment not now – but in 10 years if something happens to you.
The entire point is that there is a reason that 70% of our clients, when truly understanding the pros and cons of the loan, opt for this reverse loan or line of credit versus a conventional loan or paying cash for a home. At the end of the day, it is an insurance policy that you and your wife are bullet proof in the home no matter how long either of you are alive. You are obligated to pay the taxes and insurance on the home and maintain it as a primary home, but I don’t care if you live to 120 years, no one has to make a payment and no one – including your heirs would ever be liable for any debt. That loan would never make sense if either of those things could happen, and certainly my father would not be in that loan, if we as children, needed to worry about picking up a bill at the end of the day. We don’t care if he does not make a mortgage payment for life and he enjoys his retirement and every moment of it, but it would not make sense if we could ever be liable.
Please understand one thing. The reverse loan is not right for everyone, but before you think you know the pros and cons of the loan and how people more than ever are taking advantage of the options it brings today, then please visit with a senior mortgage planner or an investment advisor and review the options today to make your own decisions. This loan that is government backed and FHA insured has less surprises then any loan in the market place and is certainly as regulated as any loan in the market place today. Until next time. Brandon Hansen.
Brandon Hansen is a senior mortgage banker for Cherry Creek Mortgage with offices in St. George and Sun River – www.cherrycreekutah.com 435 525 2266/ 435 773 4164.