Reversing My Stand Against Reverse Mortgages
“I’m willing to admit that I may not always be right, but I am never wrong.”
When I started out in financial planning, I had a pretty solid line about debt and on which side of it I stood. After all, I am a proponent of the there is no such thing as “good debt” credo. While I railed against Justin Bieber
pimping promoting a prepaid debit card, I also threw in some good jabs at Fred Thompson and Henry Winkler for promoting reverse mortgages.
Recently, a combination of a new program from HUD (whoo! The government encouraging you to borrow money!) and research from Drs. Sacks and Sacks – academics, not a law firm ready to help you out if you’ve been injured in an auto accident – has caused me to change my tune a little bit.
Reverse mortgages may not be the demon that I made them out to be. They’re not a panacea, and they’re certainly not a substitute for making sure that you have enough in your retirement savings and investments to fund your lifestyle needs, but, for those retirees and soon-to-be retirees who are not quite there with what they need to have, a reverse mortgage may actually be appropriate.
Yeah. It’s hard to type that. I’m still in the old mindset of REVERSE MORTGAGE BAD despite seeing evidence to the contrary. This isn’t surprising. According to neuroscientist Dr. Joe Tsien, the older we get, the harder it is for us to get rid of useless information. Put another way, Monkey Brain gets set in his ways. It’s time to rattle Monkey Brain’s cage.
First off, let’s examine reverse mortgages and the type which I think is correct to use for the scenarios in which it’s correct to use them. Then, we’ll evaluate the causes of why reverse mortgages actually work, including real options, safe withdrawal rates, and Einstein’s favorite, compounding interest. Finally, we’ll look at scenarios where I think it may be correct to use a reverse mortgage and how to use it.
My EN102 professor, LTC Gruner, would have been so proud of that introductory paragraph. Tell ‘em what you’re gonna tell ‘em, tell ‘em, and then tell ‘em what you told ‘em.
What is a reverse mortgage?
In simple terms, a reverse mortgage is where the bank slowly pays you for the rights to own your home. The bank gives you a stream of payments for as long as you’re living in the home, and after each payment, interest accrues. At the end, when you’re no longer living in the home – whether because you had to move to an assisted living facility or you peeled the garlic – the bank can use the home as the collateral against the loan and claim it unless you or your estate pays the balance on the mortgage.
The term that the government uses is a Home Equity Conversion Mortgage (HECM) – the government loves acronyms. To qualify, you need to be living in a single family home, condo, or mobile home, or you need to be the owner-occupant of a 2-4 unit home. You also need to have little to no mortgage on the home, since the idea is that you’re using the equity built up in your home in order to fund cash flow requirements. If you’re using the reverse mortgage to pay off your existing mortgage, then you’re not going to get as good of a deal out of the reverse mortgage. You also need to continue to maintain the house, keep insurance on it, and pay your property taxes. This helps to ensure that there’s a worthwhile house available for the bank when you’re no longer occupying it. Finally, there’s a little age discrimination going on. You have to be at least 62 years old to qualify for one.
Why Are Reverse Mortgages Viable?
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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
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