Fox Business: Reasons for Not Getting a Reverse Mortgage

While mainstream press has recently appeared to shift more favorably toward reverse mortgage use, a Fox Business article this week takes the anti-reverse mortgage approach in spelling 10 reasons not to take out a reverse mortgage. 

The article gives a basic overview of the way a reverse mortgage works, then details 10 reverse mortgage cons—some of which are not fully explained. 

Those cons include fees, capped loan amounts, and the fact that the loan amount will be based upon the age of the younger spouse. 

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However, many of the article’s claims apply to all mortgages (not just reverse mortgages), such as having to pay property tax and insurance, having to pay mortgage insurance, and the fact that loan interest continues to accrue over time. 

“Although your home may represent a significant source of equity, there are just too many pitfalls associated with a reverse mortgage,” the author writes. “If you need money out, it would be far better and cheaper to do a cash out refinance, but if that’s a problem because you don’t earn enough income to make the monthly payments, then you should sell your home, and get all the money that a sale would bring.”

View the article on Fox Business.

Written by Elizabeth Ecker

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  • I am honestly astonished at the number of articles by so called “Experts” who state that a HECM is not a viable retirement option. They invariably go on to state that selling the home and “Right Sizing” is a much better option.

    The auther (Peter The FOOL) lists all of the reasons whe he beleives a HECM is not a good option and includes examples of fees and costs. Amazingly he doesn’t list a single cost of what it costs to sell a home, find another one and move!

    Let me illuminate everyone on the Real Cost of Sell ing your home. For the purpose of this article I’ll use a value of $400,000:
    Commissions: 5-7% so let’s go with 6% = ($24,000)
    Preparing your home to Sell: 1% = ($4,000)
    Seller Credits, Costing Costs, Title TFR etc. 2-4% so say 3% = ($12,000)
    Moving Costs: 2% = ($8,000)
    That’s nearly $50,000 just to sell and move! Now you have to pay of the new house or place to live…
    I think I’d rather Agin-in-Place Peter. Unless you would be willing to cover my costs? No!? I didn’t think so.

    • Forward in Reverse,

      While your moving costs are unusually high, your point on the costs of moving are well taken.

      The trouble with the article is how little the author knows about HECMs in particular. He states: “To obtain and maintain your FHA-insured HECM, you must pay a 1.25 percent premium each year on your loan balance.” His first mistake is to say that to obtain a HECM, an insurance premium of some percentage of the loan balance is incurred. It is not the loan balance upon which upfront MIP is computed but rather the Maximum Claim Amount (“MCA”) which is generally the appraised value of the home (or if lower, the Lending Limit (“LL”), which is now $625,500). It seems he also might not know about HECMs for Purchase since the amount upon which the calculation is based is the lowest of 1) the MCA, 2) the LL, and 3) the purchase price of the home. He also misstated the percentage on upfront MIP which is 0.5% or 2.5% depending on the amount of proceeds disbursed at initial funding.

      His third mistake was to use the verb “pay” when it comes to MIP with the phrase “each year.” For ongoing monthly MIP the rate is an annual rate but it is charged and paid monthly. Also it and upfront MIP are not paid for by the borrower but rather the servicer/lender. The borrower can reimburse the lender monthly for the charge but will pay it along with all related compound interest and compound MIP if payment is deferred which it generally is. So as to the borrower, all MIP is accrued but can be paid at any time; if not paid currently it becomes part of the balance due for computation purposes.

      So if the author cannot get one of the simplest things about HECMs correct, how MIP is charged, how will he ever be able to competently analyze a HECM? The problem is most seniors do not generally have sufficient knowledge themselves to determine when an author is ignorant about HECMs and when an author knows HECMs well.

      • No, if you are relocating a significant distance those moving costs might not even cover your move. I had estimates as high as $16,000 to relocate from CA to the South and that was 10 years ago.

      • Michele,

        It is not distance alone but the weight and sizes of the items you are moving along with the cost of any special services you select. Most seniors who move do not go great distances from their current home. As a senior my last move was a little over two years ago and all of my costs were about $3,000 due to not needing special services since friends and family personally provided much of those services and we were moving less than 10 miles from our old home but we had three different places to drop off items the movers were transporting and the total miles were just over 10 miles. So we had no storage costs or significant special services other than the cost of a few hundred boxes most of which are still unopened in a storage facility several miles from our current home.

  • Why? Don’t these “experts” know that the only difference between paying off a HECM and a forward mortgage is that no periodic payments of interest, principal, or other accruing loan costs are required with a HECM? Like most so called “experts” they do not know the benefits of managing a mortgage payoff using a HECM (no late payment penalties, no late payment credit dings, ability with an adjustable rate HECM to have access to mortgagor payments, etc.). There are NO payoff rules which prevent a HECM borrower to make a pay down of any amount at any time; neither are any prepayment penalties with a HECM nor have there ever been any such penalties.

    Very few financial advisors (including CFPs) have any training in managing the payoff of debt other than when there are funds available beyond minimum required payments for debt payment purposes, 1) pay off those debts with the highest interest rates first, 2) pay off those debts with the highest percentage of monthly payment to balance due first, or 3) some reasonable combination of the first two.

    While most financial advisors believe they only have their clients best interests at heart, too many times their ignorant advice particularly when it comes to HECMs has the potential to harm their clients.

  • Mr. Bennett may be an expert at many things but reverse mortgages are not among them. It seems he even lacks a thorough understanding of equity and how it is computed. It is this latter point which should be addressed since Mr. Bennett is not alone in this regard.

    Mr. Bennett states: “As every month passes, the homeowner with a reverse mortgage sees debt increase and equity home equity decrease. That equation doesn’t benefit heirs, so if you planned on leaving your heirs a little something, it will probably be very ‘little.'” Is Mr. Bennett really right? Although there are cases where his conclusions about equity are correct, there are far more cases where they are not.

    If the increase is due solely to accruing costs as is the case with fixed rate HECMs, that is one thing but if the increases include payouts to the borrower, Mr. Bennett failed to state the amount of such payouts. So assuming the simplest case, for purposes of this comment, only accruing costs will be considered.

    Equity can increase despite costs accruing and even growing due to compounding. It can increase in the following three ways: 1) home appreciation increasing faster than costs are accruing, 2) borrower monthly prepayments exceeding accruing costs, and 3) some combination of the first two. Also how quickly costs accrue depend on the balance due each month and what the interest rate index being charged was each month.

    Yet the problem with Reason 10 goes much deeper. In the simplest of cases where the senior has no other significant asset throughout retirement, it makes some sense to title the tenth reason as “Heirs get less” but for a senior with other significant assets such as IRAs, 401(k), other defined contribution plan accounts, portfolios, businesses, collectibles, rentals, other homes, and portfolios, how a reverse mortgage impacts the total estate is far more significant than how it impacts home equity alone.

    Some of the reasons were reasonable but far too few to make the article worthy of consideration by seniors looking into reverse mortgages. Unfortunately some seniors will read and consider its contents.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

  • I read the actual article as well as reading all the comments from my colleagues I feel my colleagues pointed out very good reasons why the article does not hold water.

    I don’t intend to go over all of what has already been pointed out to you.

    What I do want to say is that FOX – NEWS should have never come out with an article like this with out having a reverse mortgage expert’s article running either on the same day or the next day to rebut the authors article or embellish on it.

    I read the article and it was terrible, many of the points the author brought out were wrong and the way his presentation was made was slanderous to each and everyone of us in the reverse mortgage industry!

    I am amazed that this article was run by FOX-NEWS, especially the way it was presented!!

    John A. Smaldone

    • Why on earth are you amazed? This is how Fox News presents everything: completely slanted, with language intended to incite disdain toward the object of the report, and not fact-checked. Just consider the source.

  • “While mainstream press has recently appeared to shift more favorably toward reverse mortgage use,”

    I must have been asleep. When did mainstream media shift other than celebrity commercials? When Fonzi starts promoting reverse you know things are not good.

  • Ten Reasons Not to Read The Motley Fool

    Laurie MacNaughton

    Ok, enough is enough – what started off as sloppy journalism unbefitting a widely-read publication that purports to “help people take control of their financial lives” has become flat-out obnoxious as it spreads through the news channels.

    I’m speaking about Peter Bennett’s poorly-reasoned, poorly-researched piece on reverse mortgage, published yesterday in The Motley Fool. The first time I was emailed a link and asked to comment I was willing to be forbearing: year’s end is historically slow in the financial markets, and doubtless the reporter was compensating by resorting to a favorite whipping boy.

    Then I was sent the piece again for comment. And again. And…yet again. And pathetically, each was from a different news outlet. Apparently, fact-checkers for every major American publication are in Boca for the New Year, and left their cell phones in their hotel room.

    So let me address some of most laughable, some of the most sensationalistic, and also some of the rudest and most elder-demeaning statements made by Motley Fool reporter Peter Bennett.

    Bennett lists 10 reasons not to consider a reverse mortgage, and nearly each point becomes more fantastical. I have picked out his first couple points and last couple points, and analysed them sentence by sentence.

    Point 1. High fees

    Statement: Closing costs for a typical 30-year mortgage might run $3,000.
    Reply: True. But they might not run $3,000. Closing costs are contingent upon many factors, and to pull a number from thin air is presumptuous and subject-matter ignorant.

    Statement: For a reverse mortgage, they could run as much as $15,000.
    Reply: True, but they might not run $15,000. There are many, many factors that determine closing costs, and in some cases closing costs could be, well, the $3,000 Bennett seems fond of.

    Statement: That’s a lot of money just to access the equity in your own house.
    Reply: Says who? If closing costs are this high it typically means there is a “forward” mortgage being paid off. A monthly mortgage payment is the single biggest monthly expenditure for most seniors, and a refinance that reduces their payment $70 a month just isn’t going to do the trick as far as putting them on solid financial footing. What they need is NO monthly mortgage payment, and a financial buffer. A reverse mortgage is the only main-stream refinance product available that can provide both, and that creates a solution to the cash flow problem so common during retirement.

    Statement: Reverse mortgages come with more regulations than a regular mortgage so that accounts for some of the additional fees.
    Reply: Baloney. Check your facts, Mr. Bennett.

    Statement: Lenders also charge more because they claim they take on unique risks, in that reverse mortgages aren’t based on your income or credit score.
    Reply: Again I say baloney and check your facts. Or, better yet, cite your references.

    Point 2. Property taxes and homeowners insurance to pay

    Statement: With a reverse mortgage, the property remains in your name.
    Reply: Score one for the “B” – he got this one right.

    Statement: And because the property is in your name, you are responsible for paying all property taxes.
    Reply: Um, do you know how this works, Mr. Bennett? They’re already paying property taxes themselves if they have no mortgage, and if they do have a mortgage, they’re escrowing for them. They’re already paying. This is not a new concept for a homeowner aged 62 or older. AND, many older homeowners qualify for a property tax reduction or for a property tax waiver. Their reverse mortgage does not impact their eligibility for this.

    Statement: The lender also requires that you continue to carry homeowners insurance.
    Reply: This is also not a new concept for a homeowner. And it is really rather demeaning to suggest the mature, experienced homeowner is not aware of homeowners insurance.

    I’m going to skip several points here, each of which contain line after remarkable line of trash talk. But the last two points are so bad I can’t skip them.

    Point 9. Stringent repayment rules

    Statement: Typically, when the last remaining borrower living in a reverse mortgage property dies, the FHA requires loan servicers to send a letter showing the balance of the loan due.
    Reply: No “typically” here: the servicer is required to send a statement of the balance due.

    Statement: Upon receipt, the heir or estate administrator has 30 days to declare whether the loan will be repaid or the home sold.
    Reply: By federal mandate there is an automatic 6-month period to sell or refinance the home, with two additional, six-month extensions possible.

    Statement: If no decision is made, the lender can initiate foreclosure proceedings.
    Reply: If no decision is made on any financed home, the lender can initiate foreclosure proceedings – and no 6-month grace period is tendered in the case of a “forward” mortgage. It’s just plain rude to imply homeowners and their families are unaware that homes with financing have to be dealt with.

    Point 10. Heirs get less

    Statement: As every month passes, the homeowner with a reverse mortgage sees debt increase and equity home equity (sic) decrease.
    Reply: This is an appalling presentation of half the story. The amount the lender has lent collects interest, which will be repaid along with the loan, once the last person on the mortgage has permanently left the home. However, if homeowners have a line of credit, that line accrues a compounding growth month over month – imagine it’s a lump of bread dough sitting on the counter, getting bigger over time. The line of credit will grow even if the home goes down in value.

    Statement: That equation doesn’t benefit heirs, so if you planned on leaving your heirs a little something, it will probably be very “little.”
    Reply: Want to know what really doesn’t benefit heirs, Mr. Bennett? Adult children of aging parents burning through their own retirement funds at a double pace as they struggle to help finance their elderly parent’s longevity. If that older parent, however, can be self-pay through the end of life, his/her adult children stand a much greater chance of enjoying financial survivability in their own retirement.

    So to the armchair critics of reverse mortgage I say this: check your facts. Do your research. And don’t sit in judgment on those striving to maintain their own independence and dignity during retirement.

    Laurie

    Laurie MacNaughton [506562] is a freelance writer and Reverse Mortgage Consultant with Southern Trust Mortgage.
    She can be reached at 703-477-1183 Direct or Laurie@MiddleburgReverse.com

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