As a reverse mortgage specialist, I’m constantly reading about the products I sell and what people say about them. The other day I was reading an article in a trade publication about how reverse mortgages are a good option for people who “need a source of income” and who are “struggling to stay ahead of their bills.” I had to shake my head. “Not again,” I thought.
There was plenty wrong with the article, but the biggest issue I had with the piece was that reverse mortgages were again being portrayed as a “loan of last resort.” An even bigger problem is that many people in our industry, as well as many financial planners and Realtors, still think of reverse mortgages this way.
The truth is that most homeowners would be wise to get a reverse mortgage the minute they turn 62 years old and use it to supplement their retirement income. In fact, widespread use of reverse mortgages can also help prevent what is shaping up to be a retirement disaster of epic proportions in this country. People are living longer, and many won’t have enough money saved to retire in their 60s.
According to an October 2020 report from the Center for Retirement Research at Boston College, the median balance of retirement accounts for households aged 55-64 years old was $144,000, which would generate only $570 in monthly income. According to a 2019 retirement survey by GOBankingRates, 64% of Americans will retire with less than $10,000 in savings.
Reverse mortgages could go a long way to help people live more comfortably when they retire, and, in fact, could change the way retirement is approached in this county. They can also give loan officers an opportunity to help homeowners in ways that enable them to enjoy a better quality of life in their retirement years. However, these opportunities will be missed unless lenders find a way to change the conversation about reverse mortgages.
Myths Die Hard
Most Americans, and indeed most mortgage professionals, have it branded in their minds that the goal of homeownership is to pay off your home. This is a deeply held cultural belief that dates to the Great Depression and mortgage-note-burning parties that tell us the goal in life is to be free and clear of all debt.
Many Americans also think of reverse mortgages as something to avoid at all costs. We’ve all heard the horror stories about reverse mortgages, and how countless widows were kicked out of their homes. To be sure, the reverse mortgage industry has, in the past, done a lot to earn this bad rap.
For a long time, I believed these things too. I spent the bulk of my early career in the mortgage industry advising my clients to stay far away from reverse mortgages. However, in the early 2000s, I went to a reverse mortgage seminar in Miami—basically just to get away from the Wisconsin winter—and it changed my life. I saw that reverse mortgages could play an important role in a borrower’s financial retirement plan.
A reverse mortgage is a federally insured loan that enables homeowners 62 and older to access a portion of their home equity in either cash, monthly payments, or as a line of credit. There are several types of reverse mortgages, but by far the most popular is the FHA-insured Home Equity Conversation Mortgage (HECM), which allows borrowers to access between 30% and 75% of their home’s value depending on current interest rates and the borrower’s age. Borrowers can use reverse mortgages to pay for medical expenses, for travel, or to diversity their financial portfolio by investing home equity into other assets.
The HECM is not a loan of last resort, nor is it a welfare program. There are credit requirements, and you need to show that you’ve made your last two years of mortgage payments on time. However, the HECM is a nonrecourse loan—which means that after the borrower passes away, if the home’s value is less than the loan, no one can come after the borrower’s estate for the difference. However, most of the time, there is ample equity left due to normal home price appreciation. In most cases—except for unusual downturns such as the one the market saw in 2008—the home’s value increases faster than the negative amortizing interest on the reverse mortgage loan. In other words, there is usually more equity left at the end of the life of the loan than there was at the time the loan was originated.
Let’s Talk About Buckets
I’ve found a good way to talk about reverse mortgages is to picture the average homeowner as having three buckets of wealth:
- Bucket #1: Income
- Bucket #2: Nest Egg—savings and investments, including a 401(k) or IRA
- Bucket #3: Home equity
Up until retirement, people take money from Bucket #1, their income, and place into Buckets #2 and #3. If they’re good savers, most people are putting away as much as 10% or 20% of their income into Bucket #2. However, they place 30% to 40% of their income into Bucket #3, their home, and often they never consider that equity for cash flow again.
When people retire and Bucket #1 decreases to only social security, and perhaps part-time income, they go to Bucket #2. They call their financial planner and start drawing out money for retirement, which is perfectly normal. If they’re lucky, they’ll have enough money for the rest of their lives. But given that people are living quite a bit longer these days, many will deplete Bucket #2 before they die.
Recently, researchers have discovered something interesting. They found it can be better for people to pull money from Bucket #3—their home—as a loan of first resort, in the form of a reverse mortgage and continue to let Bucket #2 grow. For example, research compiled by Wade D. Pfau, Ph.D., a professor of retirement income at The American College, and published in The Journal of Financial Planning, found that incorporating a reverse mortgage line of credit can help borrowers increase their income longevity.
By the time they truly need their retirement savings, they may have a higher net worth, more cash flow, and more money to eventually leave to their kids.
In fact, Pfau’s research found that heirs are likely to end up in a better financial situation if a reverse mortgage was taken out early in their parents’ retirement.
Understanding the Obstacles
So, why aren’t more people taking out a reverse mortgage? Frankly, our industry has done a very poor job of tackling conversations about them. People are still afraid of getting reverse mortgages because they are afraid of losing their home. Others say they want to give their house to their kids—even though, more often than not, the kids don’t want the house.
Another barrier is fear. People are afraid of what they don’t understand. They know what a 30-year fixed mortgage is, and they understand monthly mortgage payments. When they think reverse mortgages, all they see is their loan balance going up. It’s counter-intuitive, so it can be difficult to comprehend. People don’t understand that with a reverse mortgage, they can continue to make as many payments as they want or as little as they want—it’s completely optional.
Of course, there are some people who shouldn’t get a reverse mortgage. For example, it’s not a good idea if you can’t afford to pay your property taxes. Other people have the wrong house to retire in—they have a two-story house that was great for raising kids, but the costs of keeping and maintaining it are too burdensome. Still other people aren’t a good fit for reverse mortgages because they are what I call “wasters”—they blow all their money. But the majority of homeowners over 62 would make great candidates for reverse mortgages—and it’s in their best interest to get one even when they don’t need to.
The Time Is Now
Someday in the future, reverse mortgages are going to be a normal and prudent vehicle to help with retirement. To get there, it’s going to take all of us to do things in a different way. It’s about making sure everyone in our industry understands the benefits of reverse mortgages and when to recommend them. It’s also about ensuring the partners we work with know it as well, including real estate partners, financial planners, and attorneys. The equity that sits in the homes of seniors represents one of the largest asset classes in the country—over $8 trillion. Yet, unfortunately, misconceptions and the lack of knowledge about reverse mortgages are preventing people from accessing it. Tapping into that equity could drastically change the way retirement is planned for thousands of people.
If you don’t know what reverse mortgages are or how they work, now is the time to learn. Lenders should strongly consider creating reverse mortgage divisions or partnering with companies that specialize in them.
We have a long way to go to change the conversation. And with some people, including the media and financial advisors, continuing to spread fear about reverse mortgages, it won’t be easy. The bottom line is if we don’t do this, our children and grandchildren are going to be in real trouble. The pending retirement crisis is going to affect everything and everyone, from the national economy to the long-term care industry. We have another 20 to 30 years to change the conversation, but it can be done. As I see it, we really don’t have a choice.