•1. They can be complicated and confusing.
True. Reverse Mortgages are complicated and can be confusing, but they don't have to be. There are plenty of publications, web sites and mortgage professionals that can be valuable resources for you to better understand them. I know this because as a long time mortgage veteran I didn't fully understand them until I completely researched them. Important Tip: Find a credible source that you can trust to help educate you about them so they will lose their complexity and will not be confusing.
•2. If the homeowner leaves the house, or dies, soon after obtaining the mortgage, the cost of the loan will have been very high.
True. This is one of the great unknowns. If you think you will be moving out of your house in 3 to 5 years, it could be that a Reverse Mortgage isn't for you. If your health is at a level that you may not live that long then a Reverse Mortgage may not be for you. Important Tip: If you need the money for something extremely important to you then the cost may not be a very important factor in your decision making process.
•3. The homeowner's heirs will probably wind up with less of an inheritance.
Maybe. There are several strategies that can be implemented along with a Reverse Mortgage that can actually leave your heirs with MORE of an inheritance and an inheritance that is much easier on your heirs because it could allow them to avoid having to deal with the house at all. Important Tip: Work with a qualified team of financial advisors that are well versed in comprehensive planning for your golden years, otherwise your heirs could end up with less of an inheritance.
•4. Cash payments from a reverse mortgage are usually lower than the payments you might receive if you sold your house and invested the money in an income or immediate annuity.
True. This is true, but it is also not a good comparison. If you get a Reverse Mortgage you don't get access to the entire amount your house is worth, but you can stay in your house with no payments for the rest of your life or as long as you can function in the house.
If you sell the house you get access to the entire amount of equity you had in it, (less selling costs) so you could invest it for income and that income would likely be higher than what you could get from a Reverse Mortgage, but where will you live? Will you rent or buy? Either way it will take money to live either monthly or a lump sum. Important Tip: Answer the question "would the additional income from selling have a bottom line higher than the income from a Reverse Mortgage when you factor in the new cost of housing?"
•5. Three days after signing a contract, you no longer can change your mind.
True. This is absolutely true. What is being left out is that before you even get to the point of signing the contract you will have an initial meeting with a Reverse Mortgage provider to determine which type of Reverse Mortgage pay out best suits you and your situation, then you have to go through a Government mandated counseling session with a non-interested party like the AARP, and then it takes about 30 days to get the Reverse Mortgage processed for you to sign the contract.
Important Tip: It will take upwards of 60 days to accomplish all this so you will not be rushed into a bad decision and the counselor will try to make sure you understand what you are doing with the Reverse Mortgage. All of this is done BEFORE you even sign the contract, but it is true once you sign the contract you have an additional 3 business days to change your mind and if you don't then you are obligated and you can't get out of it.
•6. Homeowners receiving so much money to spend any way they wish may go haywire-and some have.
Possibly. Feeling "rich" when you have access to all that money is a natural feeling and some have gone crazy with it. That is why it is important to work with your family and a properly trained financial team of advisors to help you with a comprehensive plan for the money even if that plan includes not spending any of it yet. Important Tip: If you are the type of person that would just blow the cash then don't do a Reverse Mortgage without having a clearly defined plan for ALL of the money.
•7. For a variety of reasons, seniors are the favorite targets of crooks and scam artists, and those with ready money from reverse mortgages may be especially vulnerable.
True. Anyone with money, especially seniors are potential targets for scam artists which leads to our premise of having a team of trusted advisors to help you with ALL your decisions surrounding money. With that team of advisors you can call them for advice when one of these scam artists attempts to run their scams on you. Important Tip: Experience shows if you tell a scam artist that you "have to run this by your team of financial advisors" chances are that scammer will run with their tail between their legs. They know their scam will never stand up to the scrutiny of a team of financial advisors.
•8. A senior may have better alternatives than a reverse mortgage, such as selling the house to a family member and then leasing it back, or selling the house to the family member in return for an annuity. Or selling the house and moving to a smaller one.
True. Anytime a senior is exploring their long term planning they should consider all possibilities and if their heirs have the ability to help them out then that may be the best way to handle it. Important Tip: If one decides to sell and move into a smaller house then a Reverse Mortgage should be under consideration to help from having to invest all that cash into a new property. For example if you sold your house and got $300,000, you decide to buy a new smaller $180,000 house instead of paying the $180,000 in cash thus leaving you with $120,000 you might get a reverse mortgage for say $117,000 you have just about doubled your available cash from $120,000 to $237,000.
•9. Unless the seniors are careful not to have much money in their accounts at the end of the month, the payments they receive might disqualify them for Social Security or Medicaid.
True. Social Security and Medicaid are very important considerations in determining how to take the pay out from a Reverse Mortgage. If one keeps too much money in their account at the end of the month they could lose those benefits. Important Tip: This is where the team of financial advisors and the clearly defined plan come into play. They help you to make sure this doesn't happen.
•10. The closing costs are high.
Compared to what? The costs are higher than what you would find on a traditional loan, but a traditional loan doesn't allow you to live in your home for life with NO PAYMENTS, get a regular TAX FREE income, and a guarantee that you or your heirs will NEVER have to pay back more than the house is worth.
Or if someone needed $100,000 they could get a Reverse Mortgage and pay approximately $10,000 or they could pull the money out of their accounts and pay anywhere from $15,000 to $41,000 in taxes and likely more depending on the type of account. "Sure Kurt, but what about the interest that accrues?" Well what about the loss or interest compounding on the $115,000 (or more) you pulled out of the investment account?
Important Tip: When you compare the "costs" of a Reverse Mortgage with the "costs" from the alternatives you may find that the costs are lower or aren't that important.
•11. If you have an unusually valuable house, you cannot get a HECM or Home Keeper reverse mortgage reflecting the house's true value. Your borrowing capacity is limited because reverse mortgages are targeted at the less well-to-do.
True. There are some limits if your house is worth more than $205,000 in our area. (That may be changing to a higher amount in 2008.) Important Tip: If you need cash or have other financial needs even if you have a high dollar house a Reverse Mortgage could give you access to that money and if your house is worth so much more then the chances are when it comes time to sell the house your heirs will still have a sizeable inheritance from the sale of the house.
•12. The interest rate is adjustable, so your debt could climb if rates in general go up.
True. You know the beautiful thing about adjustable rate mortgages is they can go down too. The way Reverse Mortgages are set up they are one of the cheapest sources of money. The margins are 1.25% to 1.75% so you aren't much higher than either the one year treasury or the one month LIBOR (London Interbank Offered Rate). Important Tip: You are basically borrowing money at a little higher rate than the government is and much lower than comparable rates at any time they adjust. Plus if one is pulling Reverse Mortgage money out to invest it becomes much easier to out earn the lower rate you are paying.
Another huge benefit to a Reverse Mortgage Line of Credit (LOC) that is almost always left out is that your LOC that is still available "GROWS" by the interest rate that you are paying. So if you had $108,000 open on your LOC and the rate was 7.25% for the year your LOC would have $115,830 available on it and if your rate was 11.50% then your LOC would have $120,420 available. If your mortgage balance was say $22,000 your interest for the year at 7.25% would be $1,595 while your LOC grew by $7,830 and at 11.5% the interest would be $2,530 while your LOC grew by $12,420. Hmm, which is better in that situation?
Reverse Mortgages have gotten a bad name in the media and the financial services arena. I know that for a fact because since the mid 1990's I thought they were horrible loans that nobody should use. Well I was flat out wrong. To be fair, I was correct in the 1990's when they came out, but Reverse Mortgages are nothing like they were in the 1990's. The Reverse Mortgages of the new Millennium are excellent financial planning tools for the struggling senior to the most well off. They just use them for different reasons.
The struggling senior may use one to be able to eat and pay their bills where the well-to-do may use it to maximize the amount they leave their heirs, or lower their estate taxes, or to pay their estate taxes, or pay for long term care, essentially they just use them for much more advanced planning strategies.
If you would like to learn more about Reverse Mortgages please call Kurt Jackson at 816-415-1737 or visit www.stayinyourhomekc.com.
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