TIME: When Reverse Mortgages Become Too Risky

Reverse mortgages may be viable retirement assets for many senior homeowners, however, there is a point when they can become too big of a risk to accomplish certain financial planning strategies, according to an article from TIME.

In recent a Q&A, TIME fielded a question from one reader, who asked if he could take out a reverse mortgage and invest the proceeds in an account that would pay a “decent rate of return.” Citing that his home is paid off and the equity is just “sitting there” drawing no return, the reader then asked that if he repays the loan in 10 or 20 years with the money invested would he come out ahead?

While in theory this would sound like a good strategy, to achieve the kind of return the reader is looking for would require taking on a fair amount of risk, wrote TIME contributor Donna Rosato.


“Now here’s why it would be hard to come out ahead by investing money from a reverse mortgage,” Rosato writes. “First, reverse mortgages are costly loans to pay back compared with traditional loans. Reverse mortgage rates are currently about 5%, versus about 4% for a typical 30-year fixed rate loan. Closing costs are typically higher too.”

Considering this, Rosato suggests that a person will need to aim for a 7% – 8% return to cover taxes and interest.

“To find an investment that would give you that kind of return, you’d have to take on more risk,” she writes.

There are still situations where a reverse mortgage makes sense, especially for retirees who are cash-poor and house-rich, said Tom Mingone, founder and managing partner of Capital Management Group of New York, in the article.

If money is tight, then the payments from a reverse mortgage can provide a new steam of income, the article states. Or if a person has a mortgage on their current home and it’s hurting his cash flow, then a reverse mortgage can be used to pay off the conventional loan and eliminate that expense.

“There are definitely times when using a reverse mortgage is a smart move, but investing the money isn’t one of them,” said Mingone.

Read the TIME article.

Written by Jason Oliva

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  • Proceeds from a reverse mortgage should NOT be invested in the market. If there is no immediate need for funds, let the line of credit grow so the borrower has access to tax-free funds later on in retirement. A line of credit (assuming no funds have been disbursed) will almost double in about 11 years. At this point the borrower has options – creating a tenure payment, a term payment, a lump-sum, or a combination. As for cash-poor and house rich, I’ve helped clients who had a million in assets and $500K in home equity. It’s about preserving assets, improving cash flow, and creating tax-free liquidity.

    • ReverseMortgagePro,

      Will a line of credit if unused, double in 11 years? Not necessarily. That means that the effective average note interest rate would have to be very close to 5.06%.

      Using the HECM expected interest rate without stating what that is the interest rate being used to predict likely periods of doubling the size of the line of credit is very misleading. My first HECM client has had an effective note interest rate of slightly more than 2%. At 2.25% and a 1.25% ongoing MIP rate (hers is actually 0.5% due to when she got her HECM) would mean that it would take her available line of credit almost 20 years to double.

      To say that something “will” happen in the future, adequate disclosure should be given about the numbers upon which you are relying to avoid being misleading. If the average effective note interest rate for your client for the first five years is 4.25% (a likely outcome?), it would take an average effective note interest rate of 5.62% for the remaining 6 years for the line of credit to double when the ongoing MIP is 1.25%.

      To be a pro means knowing what needs to be disclosed in an example and what does not. An expected interest rate of 5.06% over the life of a HECM does not mean the note interest rate is that but that after all of the ups and downs of an adjustable rate HECM (since that is the ONLY type of HECM which has a line of credit), the average effective note interest rate will vary also, just not with as much volatility. A pro should be disclosing the interest rate upon which an example is based especially when there is no schedule accompanying the example.

  • Kudos to Time. This is a solid article that makes a very valid point.
    Using proceeds from a reverse mortgage to make “investments” is not the best use of the product. Rarely will an investment, in today’s market environment, yield a return great enough to outweigh the cost of the reverse mortgage.

    • Mike,

      Yet don’t I remember you saying that when you write about educating financial advisors (competent or not) that the financial advisors see the value of having the cash available to them for investment purposes especially in HECM for Purchase transactions?

  • When one can get risk-free growth on the unused balance in a HECM LOC – in the range of 3-5%+ at current interest rates – and have that cash available tax free if/when needed, why would one take the money out to invest?


      There are many reasons why. Of course one must define what is meant by investing. Is it investing to take proceeds out of HECM line of credit to fix the roof on a rental? I would argue, yes, since the venture is for profit. How about putting that same money into a family limited partnership to fix roofs on several rental the FLP owns where the senior gets annual profit distributions? I will let you answer that one.

      I have just two concerns: 1) is the risk worth the reward and additional costs of the HECM and 2) does the senior realize that they are trading the risk on the rentals and the FLP assets and putting it into the home? Then there is the ultimate issue: how long will the payback period be just to recover the proceeds taken from the HECM and all related costs on those proceeds and any related income taxes. Finally, legal counsel should review all legal documents related to the proposed investment especially those related to the FLP.

  • The ReverseMortgagePro makes very good sense. The intent of a reverse mortgage was and always will be not to to put the proceeds in anything that would create a risk!

    Tom Mingone says, “There are still situations where a reverse mortgage makes sense,
    especially for retirees who are cash-poor and house-rich”.

    Well my friends, I say regardless if a borrower is Cash-Poor and House-Rich or the other way around, there are many reasons a reverse mortgage makes sense. I could write 6 paragraphs on counter acting what Tom Mingone stated.

    In today’s environment a reverse mortgage has many purposes that are not risk investments. Whether it is to grant your children part of their inheritance while the borrower is still alive to leveraging tax free funds. I am not going to go into those 6 paragraphs I mentioned but I think the readers know where I am coming from!

    John A. Smaldone

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