Despite ongoing changes that aim to make the reverse mortgage a safer product for consumers and the Federal Housing Administration-insured program as a whole, the product still has some barriers to overcome in order to transition into a mainstream retirement planning tool.
Some of these barriers include the reverse mortgage’s upfront costs, misuse, the stigma associated with tapping home equity, and misconceptions of the product, according to John Salter, an associate professor of financial planning at Texas Tech University, who spoke during a recent webinar hosted by Reverse Mortgage Funding (RMF) and the Financial Experts Network.
Still, using a reverse mortgage will become more important in securing Americans’ retirement in the years to come, Salter and others in the financial planning community agree.
“Anybody doing work in the retirement world knows that home equity is going to have to be an important part [of the retirement equation] moving forward, because the baby boomer generation, especially, has big values and big equity tied up in their homes,” said Salter, who has spent years studying reverse mortgages.
Given the need to tap this equity, it’s important to acknowledge some of the barriers keeping reverse mortgages from becoming a bigger piece of the retirement puzzle. Salter and his peers shared four reasons the product hasn’t yet become a mainstay in portfolio strategies.
While a reverse mortgage doesn’t require a monthly mortgage payment, there are still costs associated with the loan.
“One of the issues that seemed to not make it a mainstream product was the upfront costs,” Salter said. “Prior to 2010, the [FHA] insurance fee was 2.5% of the home value. Plus the closing costs, insurance, appraisal fees, attorney fees, etc.”
That led many people, Salter included, to misunderstand the scope of the product, partly because it was so expensive relative to the average household income and home equity.
“It was hard to get around the cost issue and say, ‘Hey, this makes sense,’” he said.
However, today, the home equity conversion mortgage (HECM) has an upfront mortgage insurance premium (MIP) of 0.5% with the caveat that borrowers are limited to 60% of their principal limit during the first year.
“If you breach that, then you owe the original 2.5%,” Salter said.
Despite the costs, reverse mortgages can offer a number of benefits to retirees.
“It’s not totally free — which it shouldn’t be,” Salter said. “[But getting] over that and saying, ‘There are some benefits,’ [is key]. … I always say you get what you pay for.”
Over the years, the reputation of the reverse mortgages has been negatively impacted by borrowers who have misused the product.
One such example of this misuse is the ongoing non-borrowing spouse issue, Salter said. A common situation is as follows:
“There’s a 62-year-old husband and 60-year-old wife, he did the reverse mortgage, left the wife off, passes away after using all the proceeds and now the widow is left with repaying $200,000,” Salter said. “Stories say, ‘She’s losing her house because of a reverse mortgage.’ No, she’s losing the house because her husband did this without her and she’s selling the house to repay the loan.”
The Department of Housing and Urban Development (HUD) has been working to address such issues, but Salter said the issue at hand isn’t the product itself, but the way in which it’s used.
“I had a student who needed a credit hour to graduate and I said, ‘Get on the Internet and scour all the popular press. Find all the articles you can on reverse mortgages and find me one that says the product was wrong,’” he said. “She came back and said, ‘I couldn’t find one.’ She had lots of stories about the misuse [of reverse mortgages], … but nothing that would make me say there’s anything wrong with it. I think it’s just how it’s being used.”
For some time, owning a home has been the “American Dream.” To take away from that is a societal no-no, some say.
“In our society and culture, using home equity as part of retirement has been taboo — you don’t spend that,” said Dennis Channer, principal at Cornerstone Investment Advisors, LLC, during the webinar. “This concept of a course of last resort has permeated people, including myself, up until recently.”
There is a stigma associated with using home equity to fund retirement expenses, especially when someone’s home is paid off, Salter said, noting that some people feel like they’re getting back into debt by tapping their home equity.
Finally, misconceptions of the product have kept reverse mortgages from becoming a mainstream retirement planning tool, at least for now.
“I’ll lose my home” and “the bank owns the home” are some of the common misconceptions tied to the loan.
However, with more financial planners educated on the loan’s benefits and how it works, consumers will start to have a better understanding of how a reverse mortgage might fit into their retirement plan.
In fact, the recent webinar was aimed at teaching financial advisors how a HECM loan could be used as a portfolio protection strategy.
The session — which offered the opportunity to earn 1.5 continuing education credits for Certified Financial Planners — joins other such initiatives meant to educate the financial planning world on reverse mortgages.
This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.
Written by Emily Study