HuffPo: Reverse Mortgage Borrowers Should Consider Wealth Goals

Wanting to maximize wealth, rather than consumption, is an important distinction among reverse mortgage prospective borrowers. Jack Guttentag, also known as The Mortgage Professor, outlines the difference via his blog, published this week by the Huffington Post.

Responding to a reader letter inquiring about whether a reverse mortgage would lead to the reader being “better off” in 10 years, Guttentag details the two approaches. [The reader has a 3% interest rate on a $380,000 forward mortgage balance on a home worth $626,000.]

For wealth maximizers, or those who wish to have more wealth in the long term—often those who wish to sell their homes eventually or leave large estates to their heirs—the reverse mortgage may not be the right option, Guttentag writes.

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“The transition to a reverse mortgage would reduce his wealth primarily because HECM reverse mortgages require mortgage insurance,” he says, also noting costs such as settlement fees, and losses incurred if the borrower itemizes his tax deductions.

But for consumption maximizers, the same borrower in the same situation will benefit from the reverse mortgage. That is because consumption maximizers wish to increase their accessible funds now, rather than in the future. The borrower who takes a reverse mortgage under the reader’s scenario will be able to access more than $2,000 per month.

“Consumption maximizers don’t anticipate selling their home, and the size of their estate is not important,” Guttentag writes. “The potential for increased consumption outweighs the decline in wealth resulting from growth of the reverse mortgage balance.”

View the column at the Huffington Post.

Written by Elizabeth Ecker

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  • I feel in this case, Jack does not get it. Even if a borrower does not have a need for a reverse mortgage and they have plenty of equity in their home. Take out a reverse, pay off what little loan is left on the house and leave the rest in a line of credit.

    At least the borrower is getting more on the growth of the line than they are going to get else where and the nest egg is there if the borrowers financial situation changes. If it does not, the heirs are still in great shape.

    For others the reverse mortgage would be their way of eliminating monthly debt obligation and retire with a lot less financial stress, even with all the new changes occurring.

    John A. Smaldone.

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