Reverse mortgage-- why not??

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fmhealth
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Reverse mortgage-- why not??

Post by fmhealth »

Hello fellow BHs. As I hike through the mountains everyday I try to listen to various radio shows throughout the country. Today I caught the last half hour with "Reverse Rob". He presented a very strong & compelling case for these mortgages. I have very little insight into these instruments but everyone I have spoken with says stay away.

Rob made the point that that's how most people feel. BUT THEY'RE WRONG!!! They were at one time toxic but that's no longer the case. The end of the interview was blocked by a strong low system ripping through the Rockies.

If any of my learned BH colleagues would care to weigh in with any sage insights I would be very appreciative.

Be Well,
fmhealth
AlphaLess
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Re: Reverse mortgage-- why not??

Post by AlphaLess »

I have only opinions on reverse mortgages.

There is nothing reverse about a "reverse mortgage". It is just a mortgage, but structured without a payment.
Also, I think these are targeted at those people with poor retirement planning and assets.

High percentage of "reverse mortgage" holders are in default on their tax or home owners insurance payments, which is a bad sign.
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Patzer
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Re: Reverse mortgage-- why not??

Post by Patzer »

Out of curiosity I just did some math on how bad their payout is.
For a $200K house, a 62 year old male would get 43K upfront, with a life expectancy 82.
A 70 year old man would get 49.4K upfront, with a life expectancy of 84.6.
An 80 year old male would be getting 57K upfront, with a life expectancy of 88.
Even a 99 year old would only 80K upfront for their house, with a life expectancy of 101.28.

The costs for originating the reverse mortgage in all of those instances were 9.7K.
None of these payouts are particularly attractive or meaningful for anyone with a reasonable retirement plan.

Someone under 80 and desperate for cash could possibly justify it.
At 80+ the SPIA with a 2% COLA pays out progressively higher than the national average for the price to rent ratio, so they might be able to sell their place and annuitize the proceeds to pay rent on a place and other costs.
At 85+ the SPIA becomes a clear winner.

For a lot of retired people a selling and renting or buying something smaller would make more sense than a reverse mortgage, as it keeps more options open to them in the future, than paying very large fees to get a very small payout.
QBoy
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Re: Reverse mortgage-- why not??

Post by QBoy »

It seems that a reverse mortgage is a good idea in theory, but in practice the market is thin and so imposes high fees and attracts only those who are desperate or unaware about how high the fees are.

It is unfortunate. The reverse mortgage market needs its Jack Bogle to bring reform and reduce costs.
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Wiggums
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Re: Reverse mortgage-- why not??

Post by Wiggums »

A home equity loan or HELOC is likely a better option. The closing costs and interest rates for home equity loans and HELOCs tend to be significantly lower than what you’ll find with a reverse mortgage.

The closing costs for a reverse mortgage aren’t cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so you don’t have to shell out the money upfront. Doing this, however, reduces the amount of funds available to you through the loan.
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Apathizer
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Re: Reverse mortgage-- why not??

Post by Apathizer »

Patzer wrote: Thu Jan 13, 2022 9:58 pm For a lot of retired people a selling and renting or buying something smaller would make more sense than a reverse mortgage, as it keeps more options open to them in the future, than paying very large fees to get a very small payout.
Exactly this. To me selling and renting makes much more sense. When I retire I don't want the upkeep and reasonability of home ownership.

It seems some people have been homeowners so long they can't imagine renting even it's oft more practical than owning, esp for elderly.
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arcticpineapplecorp.
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Re: Reverse mortgage-- why not??

Post by arcticpineapplecorp. »

did you know there are different types of reverse mortgages? people tend to talk about them as if they're one thing not three (from Larry Swedroe's "The Only Guide You'll Ever Need For the Right Financial Plan"):

1. single purpose reverse mortgage (offered for a single purpose, such as home repairs)
2. home equity conversion mortgages (HECMs)-Backed by the US Dept of Housing and Urban Development (HUD)
3. Proprietary reverse mortgages- loans developed and backed by private companies. Due to their complex nature and infinite variety, Larry didn't cover them in this book.
HECMs tend to cost more compared to other home loans. Fore example, an HECM might involve not only a 2 percent originaltion fee, but also a 2 percent fee for mortgage insurance and a monthly service fee of 0.5 percent. By having insurance on reverse mortgages, homeowners can turn to the government for their loan funds should the company managing the account go under...

Reverse mortgages carry high up-front costs compared to conventional home loans, though it is important to note that these costs (with the possible exception of an application fee) become part of the loan balance. The initial high costs make reverse mortgages prohibitively expensive for the short-term user. The National Center or Home Equity Conversion provides this example. A 75 -year-old single woman gets a $150,000 HECM on her home and finances $6500 in up-front costs as part of the loan. She receives monthly advances of $562 indefinitely, and her home appreciates at 4 percent per year. If this reverse mortgage is paid off two years later, the loan's effective interest rate cost is almost 50 percent! She receives only $13,488 for the life of the loan, compared with $6500 incurred as up-front costs (not counting accrued interest). She would receive $80,928 over the life of the loan if she stayed in the home for 12 years, driving the cost of the loan down to 10.8 percent.

The example demonstrates why reverse mortgages may be more risky for people needing in-home care. If their health condition requires moving into an assisted living or nursing home, the reverse mortgage stops making advances and the loan must be repaid, though some loans have a grace period before repaying starts.

Other points:
...Although the proceeds are tax free, reverse mortgages may impact eligibility for certain need-based public benefits such as Medicaid or Supplemental Social Security Income

During periods of low interest rates, comfortably sustaining withdrawal rates of 3-4 percent from conservatively structured portgolios becomes harder to achieec. On the other hand, periods of low interest rates favor reverse mortgage because low initial rates result in larger payouts or monthly payments. Thus, reverse mortgages can supplement portfolio returns when interest rates are low or falling, and may also help individuals (and their advisors) resist the temptation to stretch for yield by extending maturities or lowering credit quality standards.

Larry Swedroe's "The Only Guide You'll Ever Need For the Right Financial Plan, page 188-189
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Topic Author
fmhealth
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Re: Reverse mortgage-- why not??

Post by fmhealth »

Thanks everyone for your rapid-fire responses. Always interesting to receive an array of perspectives. You gave me much to consider.

Be Well,
fmhealth
delamer
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Re: Reverse mortgage-- why not??

Post by delamer »

Wiggums wrote: Thu Jan 13, 2022 10:26 pm A home equity loan or HELOC is likely a better option. The closing costs and interest rates for home equity loans and HELOCs tend to be significantly lower than what you’ll find with a reverse mortgage.

The closing costs for a reverse mortgage aren’t cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so you don’t have to shell out the money upfront. Doing this, however, reduces the amount of funds available to you through the loan.
The problem is that you need to have sufficient income to qualify for a home equity loan.

While I don’t foresee ever needing one myself, I think a reverse mortgage can be appropriate in some situations.
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JoeRetire
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Re: Reverse mortgage-- why not??

Post by JoeRetire »

fmhealth wrote: Thu Jan 13, 2022 8:18 pmThey were at one time toxic but that's no longer the case.
True. They are more regulated now.
If any of my learned BH colleagues would care to weigh in with any sage insights I would be very appreciative.
For some folks, it's a reasonable way to be able to stay in their home for the rest of their lives. These loans aren't cheap, but for some they are the only loan available. They basically trade equity in their house for the ability to stay. For some, that's a good choice.

I am the Treasurer in an over-55 HOA. I've gotten several requests for information from the loan provider for tenants who were applying for reverse mortgages. They were all in their 70s and 80s, had very little money, but wanted to remain in their home. So far, they were all approved - one is still in process.

For those who have other ways to get the money needed, those other ways may well be less costly. But for some, they are a good solution to a tough problem.
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dillybob
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Re: Reverse mortgage-- why not??

Post by dillybob »

I'm not that versed on reverse mortgages, but do have some sideline experience with them. When my grandma passed, her house went to the bank and the estate debt became my mom's. If my mom wanted to stay in the house.


One reason why you don't want to do it, is if you want whoever will inherent your house after you die, to not have any issues.

This is anecdotal, definitely not saying it's objectively true, but what my mom kinda said as well. If anyone has any clarification, please lmk
dillybob
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Re: Reverse mortgage-- why not??

Post by dillybob »

AlphaLess wrote: Thu Jan 13, 2022 8:25 pm I have only opinions on reverse mortgages.

There is nothing reverse about a "reverse mortgage". It is just a mortgage, but structured without a payment.
Also, I think these are targeted at those people with poor retirement planning and assets.

High percentage of "reverse mortgage" holders are in default on their tax or home owners insurance payments, which is a bad sign.
I'd say the reverse part is, the person doesn't care about any debt because they will be dead haha. It's a different perspective, but it's true..
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Re: Reverse mortgage-- why not??

Post by placeholder »

dillybob wrote: Sat Jan 15, 2022 2:41 pm I'm not that versed on reverse mortgages, but do have some sideline experience with them. When my grandma passed, her house went to the bank and the estate debt became my mom's.
You can't inherit debt like that but the debt could but resolved against estate assets during probation.
dillybob
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Re: Reverse mortgage-- why not??

Post by dillybob »

placeholder wrote: Sun Jan 16, 2022 1:39 am
dillybob wrote: Sat Jan 15, 2022 2:41 pm I'm not that versed on reverse mortgages, but do have some sideline experience with them. When my grandma passed, her house went to the bank and the estate debt became my mom's.
You can't inherit debt like that but the debt could but resolved against estate assets during probation.
From what my mom told me, if she wanted to stay in the house, she'd have to pay off the loan.

For some reason my mom wanted to move out of the house ASAP. Within months she contacted a realitor, and they came and took photos of the house and told her she'd get a percentage (she never did).

Luckily she had a VA loan, we found a 900 sqft house for $250k near Tacoma, WA.

I was on the fence of just staying there until we get forcefully removed, and rake/save up as much $ as possible, but that might of just been the frugal in me

I don't mind helping her with mortgage payments now, my sister does too so it's all good, but yeah
AquaBliss
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Re: Reverse mortgage-- why not??

Post by AquaBliss »

I’ve considered it but won’t be old enough to qualify for many years. I wouldn’t take the lump sum, but the 20yr monthly payments. I live in HCOL area and home value is approx $1.8M so once my home is paid off I could take say a $650k reverse mortgage and still leave well over $1M in home equity to my kids.

The biggest advantage here are these monthly payments are all TAX FREE and don’t count as ordinary income. Imagine if you had $2.5k/mo reverse mortgage payment (to you) completely tax free and doesn’t count against you for Medicare premiums, Roth conversions, etc. nor do you claim this on your taxes because its classified as a loan repayment. Sounds pretty nice on the surface and I think the taxable part is an advantage nobody brings up typically.

If I took a HELOC instead as someone mentioned, I have to start repaying it immediately and it kinda defeats the purpose. If I have to start repaying the reverse mortgage at any point in my life I’d reconsider, but you don’t and thats part of the beauty.
radR investing
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Re: Reverse mortgage-- why not??

Post by radR investing »

Most of the comments in this thread refer to a reverse mortgage where the homeowner gets money out of their home that they currently own. There is another side to the HECM, and that is when purchasing a new home.

In this case, you may look at the HECM as an annuity for your house - you make a single lump sum payment up front and can live in the house until you die. There may or may not be any equity left in the house, depending on how much the home appreciates in value, but your estate also is not liable for any money owed either (a HECM is a non-recourse loan). If you are in your early-to-mid sixties, you are able to purchase a house on about 55 cents on the dollar. So, for about half the money, you have an "annuitized" mortgage - no mortgage payments and no debts to your estate.
danaht
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Re: Reverse mortgage-- why not??

Post by danaht »

The risk here is that you could outlive the reverse mortgage - and then lose your home. These mortgages are really ideal for people who are at the end of their lives - and don't intend to leave any (or as much) inheritance. So ideally - it would be for someone who has a terminal illness - and just wants to enjoy the rest of their last months/years. I guess it could also work for elderly people who are close to going into a state funded (or insurance funded) nursing home - the only risk is that you just might have to go to that nursing home quicker than you want to. Dave Ramsey has said that the fees for these types of products are outrageous and predatory - so that is also something to watch out for.
Edify
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Re: Reverse mortgage-- why not??

Post by Edify »

Wade Pfau authored an excellent book on reverse mortgages. It provides information and strategies to determine if a reverse mortgage is right for you. Make sure you read the 2nd Edition if you are interested.
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Re: Reverse mortgage-- why not??

Post by placeholder »

dillybob wrote: Sun Jan 16, 2022 4:01 am
placeholder wrote: Sun Jan 16, 2022 1:39 am You can't inherit debt like that but the debt could but resolved against estate assets during probation.
From what my mom told me, if she wanted to stay in the house, she'd have to pay off the loan.
Yes of course that's how those loans work otherwise how would the lender make money?
deltaneutral83
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Re: Reverse mortgage-- why not??

Post by deltaneutral83 »

QBoy wrote: Thu Jan 13, 2022 10:18 pm It is unfortunate. The reverse mortgage market needs its Jack Bogle to bring reform and reduce costs.
I think the age is the key, being 70 or 82 is a huge statistical difference. One is probably going to live 10+ more years and the other is playing with house money. The origination fees and ongoing rate are usually high on this financial instrument. I wouldn't plan on a reverse mortgage for potentially 15 years, every year you're closer to being out of your home. The stats on these things are bad, I'd almost rather see them be age restricted but I know that's not possible. They make a lot of sense to someone looking for a 5-10 year fix and is well aware they're paying through the teeth to stay in their home which very well may be worth it. If you've got 15+ years to live it's a gamble IMO.
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Re: Reverse mortgage-- why not??

Post by inbox788 »

delamer wrote: Sat Jan 15, 2022 2:21 pmWhile I don’t foresee ever needing one myself, I think a reverse mortgage can be appropriate in some situations.
I don't think it's appropriate in 99% of the situations. I see it as a last resort where there are no other alternatives. While the "option" to pay back the loan is offered, I'd bet that 99% of the time, the home is liquidated. Anyone (HUD?) publish how reverse mortgages are resolved (home kept, % left after home is sold, etc.)? I'd guess that much of the time, the equity in the home is gutted by the high fees, and what was once a nice home to leave to heirs or a big chunk of change winds up being small fraction that remains. You probably get to use about 50% of the value, but the rest pretty much goes to the bank.
delamer
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Re: Reverse mortgage-- why not??

Post by delamer »

inbox788 wrote: Sun Jan 16, 2022 9:06 pm
delamer wrote: Sat Jan 15, 2022 2:21 pmWhile I don’t foresee ever needing one myself, I think a reverse mortgage can be appropriate in some situations.
I don't think it's appropriate in 99% of the situations. I see it as a last resort where there are no other alternatives. While the "option" to pay back the loan is offered, I'd bet that 99% of the time, the home is liquidated. Anyone (HUD?) publish how reverse mortgages are resolved (home kept, % left after home is sold, etc.)? I'd guess that much of the time, the equity in the home is gutted by the high fees, and what was once a nice home to leave to heirs or a big chunk of change winds up being small fraction that remains. You probably get to use about 50% of the value, but the rest pretty much goes to the bank.
If an elder wants to stay in their home and the only way to finance that is through a reverse mortgage, then the issue isn’t what’s left for the heirs.

The issue is that the asset should benefit the person who owns it.

You wouldn’t expect the elder to not spend down their portfolio if needed to stay in their home.

Why would their home equity be any different?
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inbox788
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Re: Reverse mortgage-- why not??

Post by inbox788 »

delamer wrote: Sun Jan 16, 2022 9:48 pm
inbox788 wrote: Sun Jan 16, 2022 9:06 pm
delamer wrote: Sat Jan 15, 2022 2:21 pmWhile I don’t foresee ever needing one myself, I think a reverse mortgage can be appropriate in some situations.
I don't think it's appropriate in 99% of the situations. I see it as a last resort where there are no other alternatives. While the "option" to pay back the loan is offered, I'd bet that 99% of the time, the home is liquidated. Anyone (HUD?) publish how reverse mortgages are resolved (home kept, % left after home is sold, etc.)? I'd guess that much of the time, the equity in the home is gutted by the high fees, and what was once a nice home to leave to heirs or a big chunk of change winds up being small fraction that remains. You probably get to use about 50% of the value, but the rest pretty much goes to the bank.
If an elder wants to stay in their home and the only way to finance that is through a reverse mortgage, then the issue isn’t what’s left for the heirs.

The issue is that the asset should benefit the person who owns it.

You wouldn’t expect the elder to not spend down their portfolio if needed to stay in their home.

Why would their home equity be any different?
No disagreement here. It's the banks taking advantage of people in desperate situations. Anyway, it's really a sale with leaseback option, but that doesn't sound as attractive.

What other situations are common?
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