Could a Reverse Mortgage Flip Your Retirement Plans Upside-Down — In a Good Way?

We’re always happy to hear from Keen on Retirement listeners! On this week’s show, we’re answering a question from Chuck in Los Angeles that we’ve also been fielding from some of our clients at Keen Wealth:

Hi Bill, I looked through your podcasts in search of one dealing with reverse mortgages. From what I have seen in the L.A. Times, this can be an important subject for retirees. I was hoping you would consider doing a podcast on this. Apparently, a reverse mortgage can make or break a person's financial situation and/or that of a survivor depending on the several options connected with them.

So, what exactly is a reverse mortgage? What are the options that Chuck alludes to in his question? And is Magnum, P.I. giving you good advice in all those TV ads you’ve been seeing?

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What is a reverse mortgage?

A reverse mortgage is secured against the equity that you’ve built up in your house. It’s repaid when the borrowers no longer live in the home. That means no monthly payments like a traditional mortgage. You do have to keep paying your real estate taxes and homeowner’s insurance, and you have to keep your home in good condition. You also have to be at least 62 years old and pass the lender’s credit check. Finally, the property you’re taking out the reverse mortgage against needs to be your primary residence. Your vacation home doesn’t qualify.

Is there more than one kind of reverse mortgage?

Yes, several. But for the purposes of this discussion, we’re going to focus on reverse mortgages that fall under the Home Equity Conversion Mortgage (HECM) umbrella. These reverse mortgages are federally insured nonrecourse loans, which means that the government would pick up the difference if your house ends up worth less than what the size of the loan has accumulated to over the course of your life.

On a reverse mortgage, the homeowner may receive funds in a variety of ways: as a lump sum at the outset; as a monthly tenure payment, which continues until the borrower dies or moves out of the house permanently; as a monthly term payment over a period specified by the borrower; or as a credit line on which the homeowner can draw at her own discretion.

As you’re working to secure your HECM reverse mortgage, you’ll have to pay to meet with a counselor from an independent government-approved housing counseling agency who will discuss all the advantages and disadvantages of this loan with you. You can expect to receive anywhere between 40% and 60% of the value of your home, and generally the older you are, the bigger the loan can be.

So, it’s free money? Sign me up!

Not exactly.

The big caveat to a reverse mortgage is what we call “negative amortization.” This means that since you are not making monthly payments on your reverse mortgage, the balance that you owe is going up every month. So, if you decide to sell your house or you pass away, the loan balance will be repaid out of the remaining equity in your house. That could have a big impact on how much money you or your heirs end up receiving on the eventual sale of your house.

Also, don’t forget about the eligibility requirements. If you fall behind on your property taxes, homeowner’s insurance, or home upkeep, then the lender could foreclose on your property.

But Tom Selleck says reverse mortgages are “NOT too good to be true” and “very simple.” Shouldn’t I just get one?

I like “Magnum, P.I.” and “Three Men and a Baby” too, but these reverse mortgage ads are missing one very big part of the picture: you!

Sure, reverse mortgages can be a good way to get some cash out of your home, provided that you have a decent amount of equity built up and you’re not currently struggling to pay your monthly bills. You might even consider opening a line of credit that you don’t use just so it’s there in case of an emergency.

But retirees who are struggling and turn to a reverse mortgage for a quick fix could be setting themselves up to lose their homes. If you’re having trouble keeping up with your bills, selling your home and downsizing might be a better option.

Really, the most important question to ask if you’re considering a reverse mortgage is, “Why?” Every financial decision you make should be purposeful, especially once you’ve retired. If you have a specific need that you think a reverse mortgage might help you meet, don’t call those numbers under Tom Selleck. Call up my Keen Wealth team and let’s discuss all your options.

And if you have a retirement or finance question you’d like us to tackle on a future show, contact us here.

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About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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