When it comes to reverse mortgages, there is no shortage of opinions on why homeowners should avoid them. Mortgage originators will say they’ll never go there — that it’s too complicated, borders on predatory lending or only the big TV advertising shops do them.
Maybe the real reason is fear. Fear that originators don’t know what they’re doing. Fear that they’re going to start a very sensitive demographic on a journey that they can’t control. Fear that the learning curve is too steep. There’s also a fear that the product, which in the past may have been abused, will come with a reputational risk.
It’s a rare individual who faces his or her fears un-forced. Given the shift to a purchase-loan market, rising interest rates and continued soft volumes in today’s market, now is the time to face those fears.
To be honest, there has been a lot of change and added complexity in the last few years in terms of guidelines and restrictions on reverse mortgages. On balance, however, the education and training on reverse mortgages has been markedly improved.
For those who want to take the step into this space, the timing couldn’t be better. Why? It’s because baby boomers, who are turning 62 at an estimated rate of 10,000 per day, are ill-prepared for retirement and have, by and large, not saved enough.
Some estimates say nearly 30 percent of those approaching retirement have no savings at all. Fidelity, the country’s largest retirement plan provider, reports the average 401(k) in 2018 for those ages 60-69 is $192,800, not nearly enough to cover the gap of what will be needed, along with Social Security, for a comfortable retirement.
What this demographic does have going for it is that homeowners age 62 and older control more than $6 trillion in home equity, according to the National Reverse Mortgage Lenders Association. They will live longer, and they have the ability to carry debt because of that equity.
So, think of it this way, if you, as an originator, are looking for additional volume that may help you service your client in the best way possible, a reverse mortgage should be one of the tools you can use to ease the burden of retirement on these borrowers. One of the misconceptions about reverse mortgages is that everyone who takes one out drains all their equity, leaving the property to the lender in the end without any value passing to the next generation. While that might be true in some cases, a more detailed look at a typical example may surprise you.
Let’s take a scenario of a 62-year-old male homeowner, born in 1956 with a life expectancy of 20 more years, according to Social Security Administration. His property has a fair market value of $600,000, with a current mortgage balance of $100,000, nine years left on the mortgage to be free and clear, and a monthly mortgage payment of $950. He is expected to retire and begin to draw Social Security at age 66. He has a reasonably funded retirement 401(k).
So, given this profile, why and how would a reverse mortgage make sense for this borrower? With a reverse mortgage, the homeowner could pay off his existing mortgage and free up $950 to further fund retirement, putting that money into an IRA or a 401(k). Assuming a growth rate at 4.26 in that investment, that’s an additional $55,143 of added value in four years.
Or the homeowner could pay off the house and apply the $950 toward the reverse mortgage, representing $45,600 in payments over four years. In either case, the borrower’s financial situation can be reassessed at age 66, and in many cases, the borrower would be able to defer Social Security to age 70, adding 32 percent to their monthly benefit.
So, in effect, the borrowers can pay down the mortgage, maintain the mortgage-interest tax deduction, and have flexible access to cash through lump-sum or monthly payments. With modest home appreciation and stable interest rates, the borrower’s equity position is preserved.
The right borrower
The benefits of a reverse mortgage can be very attractive for the right borrower. The reverse mortgage offers a credit line that can immediately begin to “grow” savings for retirement. Proceeds are generally tax free at both the state and federal levels. The borrowers may borrow, pay back, and re-access over time.
The credit line grows over time. It is not interest. It is a simple built-in feature that allows future access to additional credit.
The growth rate mimics the interest rate being charged. The growth rate compounds and grows regardless of the future home equity position and serves as a great hedge against future home depreciation. The loan program can be secured before life circumstances might hinder possible future creditworthiness.
There are various negative opinions about reverse mortgages. Some say they are expensive. Upfront mortgage-insurance costs, for example, are 2 percent of the home’s value, capped at $13,593. Others say, “Just get a HELOC.” With a home equity line of credit, or HELOC, however, credit can be frozen or funds restricted with limited notice, and a HELOC doesn’t offer the assurance of permanency.
Many financial planners are unwilling to discuss a reverse mortgage with clients. The fact of the matter is, in many cases, financial planners are poorly educated about the product and are subject to the same misconceptions as everyone else. The American College of Financial Services now offers a course on reverse mortgages, signaling that the trend is changing and moving toward a view that the reverse mortgage is a viable option for borrowers who meet the profile.
With more focus on education and training to help grow and develop the product, eventually it can become a valuable asset in every originator’s arsenal. All it takes is a willingness to really understand the product, to encourage your clients to do the same, and to develop the courage to face your fears.