Whenever the subject of reverse mortgages come up, invariably one of the objections that are cited is the perceived high cost of originating a reverse mortgage. Virtually every news media article about reverse mortgages cites the high cost and how it eats away at equity. That is why so many advisors recommend they only be used as a “loan of last resort” when there is no other option.
The opposite is actually true. When all costs are considered, reverse mortgages became the loan of first resort. The fact is that they actually cost considerably less when used as a source of income as compared to a portfolio or continuing to make payments from a portfolio once past the age of 62. Let’s investigate the concerns that both consumers and advisors have about the actual fees and closing costs that are the subject of concern.
Home Equity Conversion Mortgage (HECM) endorsements in March ticked upward in March, rising 3.8% to 4,220 loans. It is yet another month recording over 4,000 loans, marking another increase after February saw the first reduction in volume since December and January. HECM volume previously had been on a downward trend in the final months of 2020 prior to December according to data compiled by Reverse Market Insight (RMI).
Reverse mortgages can be a powerful financial tool in retirement — especially as more Americans age in place. But the product’s design today isn’t meeting many borrowers’ needs.
By design, reverse mortgages are meant to make retirement easier — and keep people in their homes.
Nelson Haynes, who worked at Deering Savings & Loan in Portland, Maine, is traditionally credited with creating the first reverse mortgage back in 1961. He wanted to help the widowed wife of his high school football coach stay in her home after her husband died.
In that era, “people observed that there were a lot of widows,” said Martin Neil Baily, a senior fellow in economic studies at Brookings and the former chairman of the Council of Economic Advisers under President Clinton.
“It was a time when a lot of men had pensions, and when the man died, the pension died as well. So these were women that didn’t have anything much to live on, but maybe they were living in a house that was quite valuable,” Baily said.
Reverse mortgages are surprisingly unpopular considering that they let you spend the wealth locked up in your home without having to sell, protect you from a decline in the home’s value, and even (if you so choose) pay you monthly checks for as long as you live, like Social Security. Fewer than 1% of eligible homeowners have a reverse mortgage, according to a Brookings Institution report.
The word “reverse,” which conjures images of retreat and defeat, might be the problem. Or maybe it’s “mortgage,” which is no one’s favorite financial product. There seems to be an impression that taking out a reverse mortgage is an act of desperation by people who have no choice but to crack open and spend their nest egg of housing wealth.
That’s unfortunate because a reverse mortgage can be a smart choice for a wide range of people aged 62 and older, including ones who are far from desperate. Many people who are well set for retirement have most of their wealth tied up in tax-advantaged savings plans such as 401(k)s. Extracting some money from the house they live in without having to sell it can be a good way to raise cash for big expenses—say, to help pay for at-home health care or their grandchildren’s education.
EquityAvail TM lowers monthly mortgage payments for ten years, at which time they are eliminated altogether; creates glidepath to retirement.
Innovative hybrid product, combines aspects of traditional and reverse mortgages to deliver a ‘new world of options’ for homeowners at or near retirement
For many Americans over the age of 60, the pathway to achieving financial security in retirement has become increasingly challenging. They are living longer and often have cashflow shortfalls and carry significant debt – including a traditional home mortgage. In fact, over the last three decades, the number of people over the age of 60 burdened by traditional mortgage debt has doubled to more than 40%i. With historically low interest rates, some homeowners will end up exploring a mortgage refinance in an effort to reduce monthly payments and potentially take “cash out” from their home equity. However, a traditional refi can spell trouble for borrowers over 60 who are charting their course to retirement.
When one or more borrowers have reduced income due to retirement, they may not qualify under traditional loan guidelines due to high debt-to-income ratios.
Those who do qualify can end up tethered to 30 more years of mortgage payments. If ability to make these mortgage payments is dependent upon continued full-time employment, this is not sustainable for borrowers hoping to retire.
Even if the borrowers can qualify for a refinance today, and plan to work for the foreseeable future, an unexpected income loss—through disability, death of a partner or unrelated economic upheaval, like that encountered in 2020 with COVID-19—could leave the borrowers with no feasible option but to sell their home.
The upcoming launch of EquityAvail by leading retirement solutions innovator Finance of America Reverse LLC (“FAR”) is opening up a significant new set of options for homeowners. This product is the first-of-its-kind and will provide a needed option for a large segment of the population looking to improve cashflow and remain in their home for as long as they wish.
The practice, almost without exception, is to deliver HECMs as a stand-alone. HECM reverse mortgage lenders are barred by HUD rule from delivering HECMs in conjunction with any other financial instrument. And every annuity provider we have queried has an internal rule that prohibits annuity sales when the funds used for the purchase have been obtained from a reverse mortgage.
The rationales for these restrictions are flimsy, and their cost to the retirees who are affected by them is enormous.
By Jamie Hopkins and Dr. Craig Lemoine on February 10, 2021
The Academy for Home Equity in Financial Planning at the University of Illinois at Urbana-Champaign believes that certain retirees can have a more secure retirement when home equity is used prudently. The Academy has just released compliance guidance around home equity and financial planning designed to help financial service companies update their language, policies, and procedures, many of which no longer follow best practices in the industry.
Economists Are Gloomy!? Many feel a recession is coming.
Wharton Business School’s Olivia S Mitchell recently addressed the challenges of retirement, especially for retirees. Key steps: First, “try to put together a summary budget” and “make sure you have an emergency fund.”
Academy member Tom Davison discusses the benefits of reverse mortgages for retirees and the various ways they are beneficial for consumers.
Written by Richard Eisenberg on November 25, 2019.
This Forbes article highlights the most important things to know before getting a reverse mortgage; including knowing the obligation of the mortgage and be aware of the fees associated with HECM loans.
Wanting to learn more about consumer spending in retirement? This article discusses the following topics:
Empirical research on retiree
spending has noted a “retirement consumption puzzle,” where retiree
expenditures tend to decrease both upon and during retirement. This
decrease in spending is inconsistent with general economic theories on
consumption, which suggest individuals seek to maintain constant
consumption over their lifetimes.
Government data on consumption was analyzed in this study to understand how retiree consumption actually changes over time.
results of the analysis suggest that although the retiree consumption
basket is likely to increase at a rate that is faster than general
inflation, actual retiree spending tends to decline in retirement in
real terms. This decrease in real consumption averages approximately 1
percent per year during retirement.
A “retirement spending
smile” effect is noted. This finding has important implications when
estimating retirement withdrawal rates and determining optimal spending