With all of the negative press that reverse mortgages have received in the past, Time Magazine appears to have finally figured out that reverse mortgages aren’t some sort of scam, bad deal or loan-of-last-resort. In fact, Time now sees them as a positive thing for retirees.
In Time’s article titled: “Retirees’ Biggest Asset May Be Hiding in Plain Sight,” (February 4, 2016), the message is that reverse mortgages may actually be a good idea for homeowners over age 62 with equity in their homes. (Now, where have I heard that before? Oh wait, I know… from me.)
The article’s author is Dan Kadlec, a contributing writer to both Time and Money magazines, whose work has focused on personal finance and the economy since 1990. Dan has appeared on Oprah, CNN, Good Morning America, and Wall Street Week, among others. He’s also written three books, including his most recent: A New Purpose: Redefining Money, Family, Work, Retirement, and Success, which he co-authored with Ken Dychtwald, CEO of AgeWave.
Dan’s article begins by acknowledging that most people have heard of reverse mortgages either because of the constant television commercials featuring older celebrities, or because of the consumer advocates who allege that the industry is “hawking a complicated product to seniors in need of cash.”
Then he writes:
“What you likely haven’t heard is that the reverse mortgage has gotten a substantial makeover since the financial crisis.”
(Good for you, Mr. Kadlec. Congratulations for being a journalist that actually looks into something before sitting down to write about it. I was starting to think they stopped making you guys.)
Kadlec is talking about is the legislation that was signed by President Bush on July 30, 2008. As a result of that bill, what many still call a “reverse mortgage,” is more accurately called a Home Equity Conversion Mortgage… or HECM for short. I don’t really know what came before, but the HECM of today is regulated by the U.S. Department of Housing & Urban Development (HUD) and is insured by the FHA. There’s absolutely nothing about a HECM that’s risky, costly or terribly complicated.
In fact, depending on how you use the HECM product, there may not even be anything “reverse” about it. For example, if you make principal and interest payments on a HECM, then it operates exactly like a traditional mortgage. If you make interest only payments on a HECM, then the loan balance stays the same. But, if you choose not to make payments on a HECM mortgage, then the interest is added to the balance, which is where the “reverse” comes into play.
The whole subject is largely a misunderstood mess.
With a HECM, you control the mortgage instead of the mortgage controlling you. You can make payments whenever you want to… and you can choose not to make payments whenever you want to do that. It’s up to you… and that’s why I say that it’s a safer loan for retirees than a traditional mortgage that requires monthly payments no matter what.
Kadlec also quotes a financial planner in Washington DC who says…
“It’s better to have this and not need it than to one day need it and not have it available.”
And all I can say about that is that no truer words have ever been spoken.
As I’ve tried to caution people in past articles, if you wait until you absolutely need a HECM, you may not be able to get one. It’s a really big deal that far too many people are ignoring, and when the you-know-what hits the fan… it’s not going to be good.
The Time Magazine article ends by admitting that the HECM reverse mortgage may be a “sound suggestion,” along with pointing out a number of other positive things about the HECM reverse mortgage, including the following…
“In 2014, financial regulator FINRA removed official language calling reverse mortgages a “last resort” option.”
“… the big breakthrough has been research showing that homeowners who set up a reverse-mortgage line of credit early may in time gain guaranteed access to funds in excess of the value of their house.”
“Homeowners who set up a reverse-mortgage line of credit and do not use it until they run out of other funds have generally stronger results than those who do nothing until other retirement funds are dry.”
“Tapping the equity line only when stocks are down, giving your portfolio a chance to recover, has similar benefits.”
My point is that Kadlec does a decent job writing about the HECM… maybe not a perfect job, but one that’s far better than most. And that’s encouraging, because most of those writing in mainstream media publications routinely get key facts entirely wrong as they demonstrate that what they know about retirement you could put into a thimble. To me, the shoddy coverage is not only shocking but it’s also entirely unacceptable considering the importance of the topic to millions of people over 62.
For example Kadlec clearly doesn’t understand the costs involved. He correctly states that the maximum that can be changed for origination is $6,000, and that it’s possible to have that fee waived depending on the situation, but he also mentions something he calls “a gaudy ‘set-aside’ of $6,000,” and I have no idea to what he’s referring to… there’s no such thing as an additional set-aside of $6,000 related to a HECM mortgage.
Then he writes that, “now set-asides are rare,” and they sure must be because I’ve never seen or heard of one. He mentions the mortgage insurance premium, which goes to FHA for insuring the loan, but he doesn’t explain how that insurance, and the fact that a HECM is a “non-recourse” loan, benefits the homeowner.
Still, you can’t expect journalists today to get everything right in the limited number of words to which their articles are constrained. So, all in all, I’m still happy that Mr. Kadlec did a lot better than the others that have utterly failed to understand the significant and unique benefits of switching to the HECM at age 62… assuming you can, of course.
Not an easy thing to learn about…
Even though it’s been five years since I first started researching HECM mortgages, I can still remember the very first day I started Googling the subject. I remember that day so well in large part because I soon discovered that it wasn’t an easy subject about which to learn. Every online site I found seemed to fall into one of three categories…
Government Websites: There are a few government websites on which you can find accurate information about the workings of the Home Equity Conversion Mortgage, including HUD.gov and benefits.gov. The information on both sites, however, is essentially identical and as you might expect from something written by the government… it’s not exactly riveting reading.
More than anything what’s lacking about the government sites is any sort of explanation or insight into how the different HECM programs can be applied to various real life situations. HUD’s site has bulleted lists of program requirements along with a few paragraphs on how a generic HECM works, but you won’t come away with anything close to a comprehensive understanding, and chances are it’ll leave you with more questions than answers.
For example, HUD’s site explains that, “(HECMs) are increasing in popularity with seniors who have equity in their homes and want to supplement their income,” and while that’s certainly one way a HECM might be used… it’s only one out of many. Many retirees use the HECM to purchase retirement homes while conserving their cash, and that has nothing to do with supplementing income.
The bottom-line is that if you want to truly learn about the HECM and its many facets, along with how it can be applied to any number of situations, government websites alone won’t get you there. You can memorize some of the rules and requirements, but beyond that… you’re on your own.
A Salesperson Will Call – The second type of website you’ll find when searching for information about HECMs are those of the various HECM lenders and brokers… in other words, I’m talking about sales sites mostly interested in capturing your name and contact information so that a salesperson can call and try to sell you. It goes without saying that these sites are there to sell more than educate, and some are only there to get your name and contact information so they can sell “you” as a “lead” to other salespeople.
Mainstream Misinformation – Articles appearing in mainstream media consistently claiming that reverse mortgages were somewhere between “a bad idea,” and “the absolute worst thing anyone could possibly do during their lifetimes.” The really disturbing thing about the articles, however, was not just that they had their facts wrong… it’s that almost all of them had the same facts wrong.
That’s right… one after another, each with the same incorrect facts. It was like if 20 students all copied one student’s homework, and since that one student had misspelled 10 words, the other 20 all turned in homework containing the identical misspellings. I mean, I understand that someone can misstate a fact or two now and again, but how could they all get the exact same facts wrong?
The other thing that bothered me about the journalists writing about the topic was that too often they were in their 20s or 30s… and no one in those age groups is anywhere near old enough to write about retirement… period. It’s like having teenagers or college students writing about parenting… or prostate cancer. Who really cares what they think?
My daughter’s a brilliant 25 year-old. She’s a second year law student at Georgetown… and although I love hearing what she has to say about all sorts of things… retirement isn’t one of them.
So, there I was reading articles from places like The New York Times, ABC News, Forbes Magazine, AARP and countless others, and it was abundantly clear that they all wanted me to believe that reverse mortgages were to be avoided. It made no sense, but in the face of such overwhelming evidence to the contrary, what else could one think?
I could not understand how a mortgage designed for retirees, that was insured by the FHA, regulated by HUD, and voted into existence by Congress could possibly be universally bad for people. Yes, my government can be monumentally stupid, I get that, but the one thing our politicians do know is that no one gets reelected by alienating or angering seniors. Why? Because seniors vote, that’s why.
Over the next eight months, I spent countless hours reading everything I could find on the topic of reverse mortgages. I interviewed an entire passel of experts from the industry, academia and government, along with a slew of actual homeowners from all over the country.
I became increasingly fascinated with the HECM reverse mortgage and what it could offer, depending on how it was used, but outside of the reverse mortgage industry itself, I could find nary a soul that agreed with me. I started bringing up reverse mortgages everywhere I went. I’d ask complete strangers what their views were related to reverse mortgages.
What I found was that, while many had opinions about reverse mortgages, and plenty held a negative view, none had an accurate understanding of how the HECM worked or could be used in various situations.
Time after time I’d ask people what they didn’t like about reverse mortgages and I’d hear things like…
- Because the bank owns your home. Wrong.
- Because when you die the bank takes your home. Wrong.
- Because they’re expensive. Wrong.
And much more, equally incorrect. Somehow, and quite incredibly, this country had managed to take a mortgage that didn’t require the homeowner to make monthly mortgage payments and turn it into a bad thing.
What is a HECM reverse mortgage?
A HECM is basically an FHA mortgage that doesn’t require homeowners to make monthly payments. If no payments are made, the interest is added to the loan’s balance and when the home is eventually sold or refinanced, the loan is repaid with interest from the sales proceeds. Homeowners are only required to pay property taxes, insurance and normal maintenance.
A HECM can only be used in conjunction with a primary residence, but there are many ways a homeowner might use a HECM. For example…
To purchase a home you could use a HECM for Purchase – An example would be a 65 year-old couple who wants to downsize into a smaller, or perhaps single-story home. So, the couple sells their larger home and walks away with let’s say $500,000, but by using the HECM for Purchase, instead of paying cash for the next home, the couple can buy a $500,000 home with $250,000 down… and then assuming the home remains their primary residence, they don’t have to make a mortgage payment for the rest of their lives. And they still have $250,000 in cash left over from the sale of their larger home.
To Open a Line of Credit – A HECM Line of Credit offers truly unique advantages over any other line of credit product, because it is guaranteed to increase every year by the amount of the HECM interest rate, plus half a point… and because it can’t be unilaterally cancelled by the bank, as a HELOC can.
Let’s say the annual interest rate is 3.5% percent and you opened a HECM Line of Credit at age 65 in the amount of $300,000. Twenty years later, when you’re 85, your line of credit will have grown to roughly $800,000, regardless of the home’s value. And that money is available tax-free and requires no monthly payments on the loan. It can be a great way to pay for long-term or in-home care.
To increase your retirement savings, by paying your mortgage payment to you, instead of to your bank. Let’s say that you refinanced a few years ago and have a mortgage payment of $2,000 a month when you turn 62. By replacing your current mortgage with a HECM, you will no longer be required to make monthly mortgage payments, so you can start saving that $2,000 in your savings account instead of paying what is likely mostly interest, to the bank.
Saving $2,000 a month is saving $24,000 a year. So, over 10 years, you could save $240,000 plus compounded interest, assuming you invested the money in the S&P 500 Index Fund, for example. By year 10 you could expect to have $400,000, give or take.
You can’t retire with a mortgage payment – Many homeowners make the change to a HECM in retirement simply because they feel safer knowing that if anything happens to either spouse during their retirement years… if their income drops or their expenses rise unexpectedly, they won’t have to drain their savings to make a monthly mortgage payment.
Remember, you can still make payments on a HECM mortgage any time you want to… but you also don’t have to. You can make interest only payments, principal and interest payments… or no payments… it’s entirely up to you.
Purchase a Second Home – You own a home worth $700,000 free and clear, and you want to buy a vacation home in Palm Springs or Florida… or wherever. So, you use a HECM to gain access to $300,000, and depending on your age, maybe even more.
Okay, now take that $300,000 and go get your condo on the golf course. You used a HECM to access your money so you won’t have a mortgage payment on your primary residence. And you won’t have mortgage payments on your golf course condo, because you paid cash using the HECM proceeds. (How cool is that?)
A List as Long as Your Imagination – I’m sure I could come up with a list of 100 potential uses for a HECM Reverse Mortgage, HECM for Purchase, or HECM Line of Credit. I’m 59 and it’s the only thing I’ve ever researched that made me want to be older.
I’m also well aware that there are plenty of homeowners who have a negative impression of a reverse mortgage, but the next time you hear someone saying they don’t like reverse mortgages, ask them why they feel the way they do… because you’ll either find that they don’t really know why they think the way they do, or that the reason(s) they offer are simply untrue.
Beyond that, you can have them contact me at mandelman@mac.com.
Mandelman out.
