See comments and editorial observations at the end of this article.
Ken Fisher, Special to USA TODAY Published 7:40 a.m. ET April 28, 2019 | Updated 12:39 p.m. ET April 28, 2019
TV commercials label reverse mortgages simple fixes for elderly homeowners needing cash – a financial easy button.
Sorry, there is no such thing.
Yes, reverse mortgages can be attractive. Folks older than 62 can unlock cash from their home without selling. They can simply draw monthly income, a line of credit or lump sum from their home equity, with no repayment until the home is no longer their primary residence. Staying current requires covering property taxes, homeowners insurance and maintenance.
But be careful. Read the fine print. This isn’t money you lend yourself. It’s a loan using your home equity as collateral. That means interest, typically at a high rate, plus other fees and costs. Worse than paying that interest monthly, it compounds, magnifying what you owe. When you sell, you repay the principal plus all compounded interest.
Living with your parents: The financial rules for moving back home after college
Navigating reverse mortgages. (Photo: AlexRaths, Getty Images/iStockphoto)
Reverse mortgage calculators show interest’s huge impact. Pretend you did one borrowing $2,000 per month for 10 years – $240,000 in total. At a 4.5% interest rate, your total due after 10 years would $303,530 – before fees. That’s $63,530 in interest alone. Bump it to 20 years of payments and your final bill is $779,160 – $480,000 in principal plus $299,160 in interest. Thirty years? You owe $1,524,468. Less than half of that, $720,000, is your principal. The majority is interest. The longer, the uglier – until your home’s entire value is the lender’s.
These loan amounts aren’t realistic for everyone. They’re illustrative, showing the key risk: underestimating your life expectancy, living far longer than you anticipate, and ending up aged and broke, unable to meet late-life health expenses. If you’re in great health with a good family history, you could live into your 90s or beyond. Planning for a longer life is key to not exhausting your money.
Reverse mortgages often do the opposite, with perverse incentives. The longer you live, the bigger the lender wins, while your compounding interest burden balloons. Do you really want to be cash-strapped and in debt while trying to fund assisted living or other late-life care?
Some disagree, arguing reverse mortgages can insure against depleting your savings before you die, working alongside an investment portfolio. They can. This view rightly considers folks’ assets in totality, rather than in buckets, avoiding a common error.
But it requires the elderly to invest well. Are you a strong investor? Will you be? Are you willing to risk being forced to sell your house late in life to cover a ginormous compounded interest debt, hoping there is enough left to live off of? At an age when most people need simplicity and ease, this seems unwise.
Beware products charging big fees for something you can do easily with cheaper, more simple investments. If you’re younger, save now and invest in your 401(k), reaping compound growth’s rewards rather than having them work against you. Stay invested throughout retirement without excessive binge-type withdrawals, and you should readily cover normal late-life expenses.
More security, less debt. Wouldn’t you rather have that control?
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher.
See USA Today’s take on the Reverse Mortgage back in 2016. You’ll have to decide on your own which one of these stories is “Fake News”. Obviously, one is and one isn’t — posted in the same publication three years previous.
How to tell if a reverse mortgage is right for you
Deborah Kearns, Published 7:02 a.m. ET Oct. 24, 2016 USA Today.
After Eileen Redden inherited her idyllic childhood home last year, she knew she wanted to live out her days there. Enamored with the 1945 Cape Cod in Bayside, N.Y., she threw herself — and her savings — into renovating it.
But soon after Redden had spent considerable money on improvements, her business-coaching firm lost a top client, and she felt the financial pinch.
With retirement looming, Redden, 63, needed another source of income. Today, she’s breathing easier with a reverse line of credit that allows her to pull money from her house as she needs it. Being able to stay in the home she loves while tapping its equity for a financial cushion was a win-win, Redden says.
“The key to deciding if a reverse mortgage is right for you is finding the right company to work with,” says Redden, who did extensive research before contacting American Advisors Group based in Orange, Calif., which specializes in reverse mortgages. “My loan officer took the time to listen to my financial goals, and there was no pressure or sales pitch.”
Redden is one of 58,000 people who took out a home equity conversion mortgage in 2015, according to the National Reverse Mortgage Lenders Association. An HECM is a federally insured reverse mortgage through the Federal Housing Administration. HECMs account for nearly all reverse mortgages in the U.S.
If you’re nearing retirement or already there, and you’re worried you won’t have enough money, a reverse mortgage might be a smart strategy.
How a reverse mortgage works
Reverse mortgages are the opposite of a traditional home loan in that they allow homeowners 62 and older to access their home’s equity without paying a monthly mortgage payment or taxes on the proceeds, says Chad Nicholson, a mortgage broker with American Financing in Aurora, Colo.
The FHA’s requirements to apply for a reverse mortgage include that you must be at least 62, that your home is your primary property and you live in it full time, and that you have no delinquent federal debts.
A reverse mortgage isn’t free money; you have to repay the loan when you sell the home or when you or your spouse no longer live in it, Nicholson notes. However, your surviving heirs won’t be on the hook to repay the loan. They’ll still receive any equity beyond the owed loan amount when they sell the home.
The amount of money you receive is based on a sliding scale of life expectancy; the older you are, the more you can pull out.
All of these reasons make a reverse mortgage a safer option than a home equity line of credit or a personal loan, both of which typically come with higher interest rates and stiff penalties if you miss a payment, Nicholson says.
“In retirement, it’s all about having cash flow flexibility and living a simpler way of life,” Nicholson says.
What it costs
One of the drawbacks of a reverse mortgage is the high financing costs. Borrowers can expect to pay up to 6% of their home’s appraised value in fees, including a mortgage insurance premium, third-party fees for closing costs, a loan origination fee and a loan servicing fee. Typically, you can roll most of these fees into your loan.
Also, there is a mandatory $125 financial counseling fee required by the FHA.
When should you use one?
For many Baby Boomers, Social Security checks are the only source of income in retirement, averaging just $1,230 a month, according to a study by the University of Wisconsin.
The research found that two-thirds of Baby Boomers who were employed in the private sector have no retirement income aside from Social Security, while having less than $25,000 in savings and investments. That breeds fear and uncertainty for many seniors, says Wade Pfau, professor of retirement income at the American College of Financial Services.
“Retirees are affected by a lot more risk, and they’re more vulnerable to market volatility,” Pfau says. “That’s where a reverse mortgage is a useful retirement income tool if you plan to stay in your home long enough to recoup the [loan] costs.”
If you’re a big spender, taking out a reverse mortgage could add to the problem. Don’t forget you’re reducing your home’s equity, which is important if you plan to leave the property behind as part of your estate. In other words: Be responsible with how and when you use the loan proceeds, or a reverse mortgage could cause more problems than it solves, Pfau says.
How to spot a reverse mortgage scam
Scammers use a lot of different tactics to trick homeowners into unscrupulous deals. Paul Fiore, executive vice president of retail lending at American Advisors Group, one of the largest reverse mortgage lenders in the country, offers a list of gut checks as you evaluate reverse mortgage offers:
- Does the lender take time to understand your situation and educate you? If someone is trying to rush you into a decision without taking the time to explain things and offer education, that’s a red flag.
- Does the lender allow you to choose your own reverse mortgage counselor, or does it try to select one for you? Every potential borrower must undergo independent reverse mortgage counseling with an FHA-approved HECM counselorbefore applying for the loan. The lender must provide a list of third-party resources that offer this counseling. If the lender doesn’t give you a list or pressures you to select a specific counselor, move on.
- Is the lender asking you for money upfront? Lenders may talk to prospective clients and take preliminary information about their financial situation, but they cannot process an application or obligate the homeowner to specific costs without the homeowner undergoing independent counseling and showing proof of attendance.
- Are you feeling pressured to sign loan application documents before you’re ready? Ask a lot of questions and don’t sign anything until you feel confident and satisfied that you have all the answers you need to make an informed decision.
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
This story in USA Today on the Reverse Mortgage ran supportive of Reverse Mortgages back in 2016. “Gotta believe somebody”, says Warren Strycker, Financial Professional and an advocate of the Reverse Mortgage for more than a dozen years. “Fisher has his own reputation to uphold and continues to downgrade other products to accumulate his riches. A little Fake News is added to make it more interesting.”
While the goal of saving in a person’s working years that Fisher lays out is one that should be sought after, the goal as stated in Fisher’s column doesn’t acknowledge the realities faced by many retirees, says Reverse Market Insight President John Lunde.
“The author is a longtime investment business professional and highly successful if the Forbes 400 list is to be believed,” says Lunde. “In this case he’d be well served to further educate himself on this product adjacent to his field of expertise and take another draft on his opinion piece with a more comprehensive understanding of the repayment requirements.”
For those interested, John Lunde’s background to support this argument with Fisher, is not unsubstantiated: Following is Lunde’s credentials to support his remarks.
“John K. Lunde is an expert in financial analysis and investment modeling in a range of industries, including reverse mortgage, investment management, real estate settlement services and wireless telecommunications. John draws on deep experience in the reverse mortgage industry and extensive relationships with leaders at top lenders, servicers and investors in the space to focus RMI’s product development and sales in productive niches for clients.
“Prior to founding RMI in March 2007, John led the Business Metrics & Analysis team at Financial Freedom to deliver comprehensive ongoing internal performance analysis across all lines of business in the company: Marketing, Sales, Operations and Servicing. John has previously worked at AT&T Wireless, Cendant Settlement Services and MetaMarkets.com and holds a Bachelor of Science degree in Business Finance from California State University San Bernardino.”
WE INVITE YOUR TRUST. “The TOOL they sell is one whose time is coming, and people who refuse even to consider a reverse mortgage in the coming years may do themselves a disservice.” (Merton). https://gofinancial.net/2019/03/love-them/
Does it pay to get a reverse mortgage early in retirement, or is it better to wait? https://gofinancial.net/2017/09/now-or-last-resort/ …