I was up in the middle of the night and was reminded that the reverse mortgage might be the most misunderstood financial tool in the market. The selling of them by handsome, older gentlemen telling insomniacs that it will solve all their problems if they are broke creates the misperception that if you aren’t broke, it’s not for you. This could not be further from the truth.
It is true that if you are stressed financially but have a lot of equity in your house, and of course that you are over 62 years old, yes it can help you. But this is the most limited and easiest to understand application of the reverse mortgage. It’s also how big companies “scale up” production of these loans. When you spend a lot of money to have older, handsome, trusted actors pitch your product, you need to drive the people that respond to those ads to a call center where you don’t spend a lot of money to answer the phones and create the loans.
As a result of this advertising though, most folks cannot hear the value message in the more effective applications of the reverse mortgage. There are at least two I can think of.
First is it is a far better solution for “accessible cash” than a home equity loan. Most folks mistakenly believe that you can open an equity line and let it sit there for when “times get rough”. When they do turn, you then can just pull money from that line. The challenge is though, that you don’t know when times get tough. When times got tough back in 2008 for example, banks shut down the equity lines of most customers, just when they needed them. They can do it, it’s in the fine print and believe me they do. Usually they say it’s about a change or drop in value, but really lenders get nervous about market conditions and cut everyone off.
This cannot happen with a reverse mortgage. If you take the line of credit option, the amount of cash available to the borrower cannot be cut off. In fact, under most circumstances, it actually grows every year. It’s safer than a HELOC and is not subject to changing market conditions. Additionally, it’s not finite, unlike equity loans you don’t have a “draw period” of five or ten years and then have to requalify for your loan. Once you have it, it’s all set.
The second application that has relevance is for the seniors that are mostly prepared for retirement, but not completely. Not everyone has saved roughly $4 million or in cash to retire and truly not worry about money and have your assets throw off $150K a year or so with no risk to your principal. Sometimes, like here in 2022, the market is down and it’s the absolute last time that you want to take a big draw down on your principal. It’s called sequence of return risk, and it’s an often hidden, until it happens, danger for retirees. Especially for folks who have savings of $1M to $3M. Being down 20% is a recipe for nervousness at a minimum but at worst can devastate your retirement finances.
This risk can be mitigated by the reverse mortgage because it can be a source of cash to draw on when it’s not the right time to draw on assets for cash flow. Then when the market goes back up, you can resume withdrawals from your accounts in the markets, pay down the reverse mortgage or both.
Finally, any discussion of a reverse mortgage requires a quick reminder. The bank does NOT own the house! The borrower stays in the home until it’s no longer their primary residence. Once that happens, the home needs to be sold and that will take six months or so. When sold, it acts like a normal mortgage, it has a balance, you sell for a price and pay off that balance. Any extra money goes to the senior, or often, their estate. If the property does not sell for enough to clear the mortgage, its’ the lenders problem, not the seniors or the estates.
There are way more things to discuss about reverses, but the bottom line is that it’s the most flexible financial tool available to most seniors and is NOT the loan of last resort for folks. No matter what handsome, trusted and overpaid pitchmen might tell you when you can’t sleep!
