Chicago Tribune: Reverse Mortgages Not For Everyone

While the general idea of a reverse mortgage sounds appealing to many retirees, some homeowners might still be better off with traditional loans, the Chicago Tribune reports.

The article draws input from a Q&A between radio host Ilyce Glink and real estate attorney Samuel Tamkin, differentiating between traditional loans and reverse mortgage options available to Baby Boomers. 

The Chicago Tribune reports

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“Given the decline in real estate values, a reverse mortgage lender might only lend 50% of a home’s value to a borrower,” says Tamkin. “That amount may not be enough to pay off existing loans on the home and give the borrower the lower interest rate he or she is looking for.”

Refinancing an existing loan that may have been paid down over the last 5-15 years might be a mistake for many homeowners if they take out a new 30-year loan, reports the Tribune. Rather than focusing on the reverse mortgage’s received monthly payment, borrowers must consider interest rates and the costs associated with refinancing the length of the loan. 

“To truly compare loans when borrowers refinance, they need to have the lender give them the monthly payment that they would have if the loan were to be amortized over its original length,” says Tamkin. “Therefore, the right comparison in looking at the old and new loans is to figure out what the payment would be on the new loan if you amortized it over 18 years. You then can compare the new payment with the old one to see how much your monthly savings will be.”

Retirees should know about reverse mortgages as well as traditional loans so they can make an informed decision about their available options. For some, traditional mortgages might be best, while others might favor the reverse mortgage path, reports the Tribune.

Read the full article at Chicago Tribune.com

Written by Jason Oliva

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  • The columnists have no idea how to provide mortgage planning.  They are looking at the issue in a proverbial vacuum where the real story should be about the overall financial needs and objectives of the client.

    For example, as a financial planner, my first objective would be to try to establish the financial position of the client including deferred income and contingent assets and liabilities. Twelve months of projected income and expenses would be needed plus known changes to their financial position and projected income and expenses.  I would also want to know about how their cash flow works and if there are significant valleys and hills or if they are fixed.  After gathering this data, the client would be asked about any other information influencing their future financial position (assets and liabilities), income and expenses, along with deferred items and contingencies.  At the same time three years of income tax returns would be reviewed along with any personal financial statements.  Then a list of missing or additional documents would be requested including income tax audit results still outstanding.  

    There should be a huge emphasis placed on their financial objectives and just as importantly their financial concerns.  There should be a review of health issues, marital issues, heirs, inheritance expectations and goals for themselves as heirs and the same for their own heirs.  Long-term goals should be discussed such as second homes and other anticipated major acquisitions.  It is also extremely important to do a profile of their risk tolerance. 

    It is easy to do mortgage amortization schedules on forward mortgages.  Four decades ago, accountants were many times still doing the schedules using amortization tables and worksheets sometimes taking several hours to complete.  Two decades ago we did them using  Excel templates and amortization software; we could check.  In between we used had held calculators and mini (many times larger than today’s laptop) computers.

    The biggest concern for most seniors is running out of the cash needed not just for basic subsistence but for their standard of subsistence during retirement.  If that is what they wanted emphasized but with the limitation of trying to maximize inheritance to heirs, viable alternative plans can be investigated and structured including the use of a reverse mortgage to avoid the unnecessary loss of cash especially utilizing an adjustable rate HECM.

    It seems many of the advisers like those authoring the column acknowledge the fact that seniors are most concerned about low cash flow in retirement, yet they ignore it in providing advice.

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