Dallas Morning News: Reverse Mortgages Are Not a ‘Free Lunch’

Reverse mortgages can be used for a variety of functions, from purchasing a home to supporting a cash-strapped retirement. Borrowers, however, must not forget that these loans do become due and payable eventually.

In a recent column on The Dallas Morning News, nationally syndicated columnist and a principal of the Plano-based investment firm AssetBuilder Inc., Scott Burns, answers two questions from readers that get to the core of what reverse mortgages actually are and what they are absolutely not.

The first reader asks for advice on purchasing a new home using a “purchase-money reverse mortgage,” also known as a HECM for Purchase. Burns points out that although the reader currently lives in a home that’s worth $100,000 and has a large down payment to put towards another home, he or she seems to not realize the costs of actually maintaining a home worth seven times that of his or her current home.

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Burns suggests that the reader examines the ramifications and consider his or her other income sources.

“Today you’re living in a house that probably has out-of-pocket annual costs of about $5,000, even though it has no mortgage,” Burns writes. “When you move into a $700,000 house, the annual operating costs will be significantly higher, perhaps $28,000.”

All in all, Burns emphasizes that even with a reverse mortgage, the reader still may have trouble maintaining a home that is much higher in value than his or her previous home.

The second question was from a reader asking for advice about a friend who had taken out a reverse mortgage in her 70’s who has no family or children and limited funds. The woman is now in her 90’s, according to the column, and can’t physically take care of herself anymore.

Her interest charges for her reverse mortgage are so much that she is upside-down on her home and has no assets to sell to help put herself in a nursing home. Burns’s response is blunt, but truthful.

“One solution would have been for her to die much younger,” Burns writes. “Another would be to go to a nursing home much earlier. Instead, she lived many years, independently, in a home she wanted to stay in.”

He explained that the issue in the woman’s case isn’t the tool, it’s the fact that she simply lived longer than her home equity could support, which can happen with or without a reverse mortgage.

The point Burns is trying to get across in both of his responses is that even with a reverse mortgage, unfortunately things can go south, much like with any other financial tool.

“Reverse mortgages are a financial tool,” he writes. “They are not a free lunch.”

Read The Dallas Morning News column.

Written by Alana Stramowski

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  • Scott has good information and less than good information. Scott rightly points out that a home with substantially higher value comes with substantially higher costs. This is a point few point to.

    His bad information was that a 62 year old borrower would get $350,000 on a home valued at $700,000. It seems Scott is unfamiliar with the concept of the Maximum Claim Amount being limited to $625,500. He also does not take into account the selling and fix up costs of the existing home so that the proceeds will be less than the $100,000 of the home’s estimated value.

    Let us say that the borrower gets the home and is out $393,000 as the down payment rather than $350,000. With about $90,000 from the sale of the existing principal residence, the net proceeds from the H4P, and $303,000 from cash and portfolio assets, the senior acquires the $700,000 home.

    What Scott did not tell the senior was that not only would costs on the new home be higher but the earnings on her other assets would most likely be less since there is now less than $1.7 million in assets other than the new home.

    As to the second case, Scott was way over the top. For example, fixed rate HECMs are not financial tools, they just plop down a hunk of cash and generally there is little more that is done with it. On the other hand the adjustable rate HECM has a line of credit that is very versatile which makes it a financial tool rather than just a financial product. Without knowing what kind of HECM was, Scott still calls it a financial tool.

    It could be that the HECM proceeds were never sufficient to support the senior in the manner that the borrower lived. Like in many situations the issue is prudence in drawing down the line of credit if that is what the borrower had. Blaming the senior or the HECM without sufficient information seems a little biased.

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