Reverse Mortgages - tell me what you know

[4FordFamily]

I am interested to hear. I work in the industry and wish to hear what people have to say about them, relatively unprovoked.

 

[4FordFamily]

Some of you old farts should be up this AM! Don't be shy! Need some data here

 

[143MPCo]

 

[jsker]

It is a bad choice. Something that you work to pay off ends up being a payment and the bank own it after all is said and done. The better option is to down size and blow what ever fund you have on life adventures.

 

[143MPCo]

I WAS looking into this for my parents after doing a little research into on various site, they and I decided it was not in their best interest.

http://www.consumer.ftc.gov/articles/0192-reverse-mortgages#how

I guess it really depends on what you want out of it as each person would have a different reason why he or she would or would not want to apply for a mortgage like that one.

 

[4FordFamily]

It is a bad choice. Something that you work to pay off ends up being a payment and the bank own it after all is said and done. The better option is to down size and blow what ever fund you have on life adventures.

Thank you for taking the bait sir.

I actually help people stop paying the bank and start enjoying retirement more frequently. Many of them are quite wealthy and use it as a way to grow wealth as well. Or, some are asset rich and cash poor. This program can help keep them in a home they love.

Downsizing is an option but I find many seniors don't want to do it because they are attached to their homes and it's a real pain. They love their communities, friends, and nearby events.

 

[Robertchrisroph]

Well if my words help. I think it is a great way for a senior to survive in these days. As long as the senior is protected in every way.

 

[4FordFamily]

I WAS looking into this for my parents after doing a little research into on various site, they and I decided it was not in their best interest.

http://www.consumer.ftc.gov/articles/0192-reverse-mortgages#how

I guess it really depends on what you want out of it as each person would have a different reason why he or she would or would not want to apply for a mortgage like that one.

This is interesting. There is a lot of misinformation there. For one, the tax deductibility is completely 100% inaccurate. If you make a payment on your reverse it will go to interest first and any interest you pay is tax deductible. If you don't make a payment for 5 years but you have a large income gain on year 5, you can lower your taxable income by paying the interest on your reverse all at once as an effective tax shield. Many financial advisors send clients to us for this reason and more to maximize wealth.

Other things such as the lost equity implication is really not the full picture. The program is designed so that you gain more equity than you lose due to appreciation of the land and improvements and the 4+% growth rate on the line of credit. If you look at an amortization table, yes the balance grows but your available funds and equity % grows faster. This is possible because of restrictions on the % equity you have access to (negatively amortized slower) based on age is more limited. If the market tanks around the time the borrowers are near passing, unlike home equity lines of credit and other mortgages it cannot be called due, frozen, etc because of market conditions. So if the house was worth 500k and you have 300k in a credit line available and overnight it's worth 100k you still have access to 300. Draw it out on your death bed and give it to your heirs and avoid inheritance tax and other taxes. They can walk away from the home without liability and don't have to care about the market!

Another misleading fact is the adjustable rates. While true most are adjustable, fixed are available. However, the 15 year historic LIBOR shows that rates have been very very low and it will likely never get as high as the fixed interest rate.

Also, because you are not required to make a payment you're not on the hook for the interest out of your monthly cash flow.

That information appears to be very, very old on the programs.

Thanks for participating though I am trying to understand public perception.

 

[4FordFamily]

Well if my words help. I think it is a great way for a senior to survive in these days. As long as the senior is protected in every way.

I agree especially with all of the changes in the last 1-5 years. Fixed incomes aren't going up, and the cost of living sure isn't going down.

Lots of cool provisions to protect seniors and their heirs now. I'll share them but I want more data points and opinions first.

Thanks all for contributing you're helping my research

 

[diablomaster9045]

isen't a reverse mortgage just renting your house?

 

[4FordFamily]

isen't a reverse mortgage just renting your house?

Not really, you live in the house and instead of paying interest monthly it is paid when you die. You have access to cash for emergencies or investing NOW. You worked hard your whole life now you have this asset but it's bringing no benefit to you.

You can structure it to pay you monthly for life, monthly for a fixed amount of time, collect lump sums, or get access in a line of credit you don't have to use but will just grow every year by 4+% (your access to cash grows). Again even if the market tanks you're protected. You can also mix and match all of those payment options. You could take out 20k for a roof, set up a tenure payment of 1k per month and have the rest in a line of credit for example.

Since you can be paid monthly I suppose some may look at it as renting to yourself but financially and semantically that's not really what happens despite that parallel.

 

[diablomaster9045]

Not really, you live in the house and instead of paying interest monthly it is paid when you die. You have access to cash for emergencies or investing NOW. You worked hard your whole life now you have this asset but it's bringing no benefit to you.

You can structure it to pay you monthly for life, monthly for a fixed amount of time, collect lump sums, or get access in a line of credit you don't have to use but will just grow every year by 4+% (your access to cash grows). Again even if the market tanks you're protected. You can also mix and match all of those payment options. You could take out 20k for a roof, set up a tenure payment of 1k per month and have the rest in a line of credit for example.

Since you can be paid monthly I suppose some may look at it as renting to yourself but financially and semantically that's not really what happens despite that parallel.

Hmmm intresting

 

[4FordFamily]

Anyone else? This should hopefully be mutually helpful

 

[jsker]

Thank you for taking the bait sir.

I actually help people stop paying the bank and start enjoying retirement more frequently. Many of them are quite wealthy and use it as a way to grow wealth as well. Or, some are asset rich and cash poor. This program can help keep them in a home they love.

Downsizing is an option but I find many seniors don't want to do it because they are attached to their homes and it's a real pain. They love their communities, friends, and nearby events.

Fair enough, we follow the Dave Ramsey plan, and have been following it for years. We run our companies the same way. This is very good to through out there, and informative.

 

[Bad Company]

I love how your paid off house "is bringing no benefit to you"... it's uh, housing you for free.
As a person well versed in finance, I find that the more complex a financial vehicle (contract) is, the less likely it is to be in your benefit. Make sure you understand every contact you sign, and READ IT YOURSELF, do not take the salesperson's interpretation as gospel, if it's not written clearly in the contract, it doesn't exist. Many salespeople do not fully understand what they are selling.

There may be some examples of where a reverse mortgage makes sense, I just can't think of many off the top of my head... maybe paying for in-home care while still wanting to live at home.

You might do much better with a mortgage and index fund (low fee) investments... or living in your paid off house, and investing the rent saved. A reverse mortgage is a great way for a bank to make money off your poor financial decisions.

 

[4FordFamily]

I love how your paid off house "is bringing no benefit to you"... it's uh, housing you for free.
As a person well versed in finance, I find that the more complex a financial vehicle (contract) is, the less likely it is to be in your benefit. Make sure you understand every contact you sign, and READ IT YOURSELF, do not take the salesperson's interpretation as gospel, if it's not written clearly in the contract, it doesn't exist. Many salespeople do not fully understand what they are selling.

There may be some examples of where a reverse mortgage makes sense, I just can't think of many off the top of my head... maybe paying for in-home care while still wanting to live at home.

You might do much better with a mortgage and index fund (low fee) investments... or living in your paid off house, and investing the rent saved. A reverse mortgage is a great way for a bank to make money off your poor financial decisions.

So with a finance background and MBA I too understand what you are saying. Financial advisors utilize me for my knowledge and refer clients to me to help them with their goals.

For someone finance savvy, surely you understand that having an asset locked and providing no financial benefit (notice the qualifier) above and beyond a place to live can be viewed as foolish.

Particularly considering the fact that living in your home and making your assets (house) work for you are NOT mutually exclusive.

Regarding your interest comment, you pay interest with a regular mortgage every month. With a reverse (assuming you do not make a payment) you pay it when you pass. The way mortgages amortize, you're essentially paying only interest in the early years of a mortgage anyway.

In addition, many of my clients are high net worth clients that use the line of credit as a tool to maximize their estate value and inheritance. Either by putting the equity to work for them in an investment account or even rental properties provides significantly higher ROI than the interest rate.

Others only use it to extend the life and value of their investment accounts by not drawing from them when the market is low. When the bull market returns they sell high and pay the line of credit down. The measlely interest accrued is chump change relative to the time value of money implications of drawing funds from investment accounts at a loss.

What good is equity when you could instead grow wealth faster by putting it to work. You still own the home and can live there. Wouldn't your heirs want more money upon you passing? If they want the house they can buy it with the gains. The power of compounding interest and capital gains should work to your favor in retirement.

I'll explain in more detail later but thank you for sharing I hear this frequently as well.

 

[4FordFamily]

Fair enough, we follow the Dave Ramsey plan, and have been following it for years. We run our companies the same way. This is very good to through out there, and informative.

Dave Ramsey's article on reverse mortgages is inaccurate on nearly every count.

He is very intelligent and has great ideas in some of his other articles. He has what I call financitis. He assumes that because he understands investments that he understands all other finance instruments as well. Remedial research on his part would negate nearly all of his claims. It's unfortunate too because people treat his articles like gospel. Some of them, rightfully so.

I think of it like this. A roofing general contractor does not necessarily know as much about construction as a construction contractor. Just because they both work construction jobs and repair things. Paralell analogies work with this in other circumstances as well. In short, I didn't go to a pediatric oncology MD for gastrointestinal surgery because that's not their expertise. I'll call a roofer for roofing needs.

And to the other gentlemens point there are a plethora of lenders with sales people that are remarkably incompetent. I know this because I've audited their calls.

Often brokers and registered non depository institutions are the worst offenders although some good knowledgable brokers exist. My company is the largest servicer of reverse mortgages in the US. Our retail division is small but the licensing requirements, audits, training, and education requirements set apart the few salespeople we do employ. Since we will hold the loan indefinitely it's in our best interests as well.

 

[4FordFamily]

I am interested to hear other thoughts? These loans don't make sense for everybody. I would say though that 9/10 seniors would benefit from one, regardless of income and wealth. At least one of the various products makes sense assuming they qualify.

For example someone that it doesn't make sense for is someone that has a paid off home worth 100k or less that is going to move in 1-4 years. This is because at this price point the costs are low but prohibitive it will take more than 1-4 years to recoop. For larger homes or homes with small mortgages many if not all fees can often be waived.

This discussion is helpful. It hurts me that people think this is such a horrendous deal. I enjoy educating people on how to use it to benefit them. This isn't the RM of the 80s. It still gets a real bad reputation. Financial advisors, lawyers, and the wealthy are coming around now and seeing the benefits but so many are left in the dark and unaware of how to use them intelligently and think the bank just wants their house.

We can't make a dime on the property by law. If you don't pay your taxes and you get forclosed on because of that, we can only sell it for what we have in it. Not one penny more or less. We do NOT want the home we make less money if you foreclose!

 

[4FordFamily]

Bump for those coffee drinkers this morning!

 

[4FordFamily]

Well thanks for those that participated it confirmed some suspicions and I think is pretty indicative of public perception still which sucks but given the past I can't say I blame anyone.

ill post the executive summary shortly