Why Financial Advisors May Want to Revisit Reverse Mortgages

Financial advisors have been long skeptical of reverse mortgages due to perceived high risks involved for their clients, but with recent changes to the program and application process, it may be something to revisit, according to a recent article from WealthManagement.com.

For the sake of their clients, financial advisors should be aware of the unique situation a reverse mortgage could help certain homeowners with, explains the article written by Kevin McKinley, an independent registered investment advisor and owner of McKinley Money LLC in Eau Claire, Wis.

“Getting a reverse mortgage is usually easier than getting a traditional mortgage, home equity loan or home equity line of credit,” he writes. “But applicants still have to jump through a few hoops. Along with the aforementioned home equity, applicants must also have enough income or assets to pay for future maintenance, property taxes and other ongoing basic expenses.”

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Though, there are a few drawbacks he points out that clients of financial advisors should be aware of to make sure they don’t get in over their heads.

The fees that are associated with reverse mortgage transactions are an important aspect to be aware of because they can vary greatly from one lender to another, McKinley points out in the article.

“Borrowers should expect to pay several thousand dollars in origination fees, mortgage insurance premiums and closing costs,” he writes. “True, those expenses can be taken from the proceeds of the reverse mortgage, but that will mean there is a sizable gap right from the beginning between how much clients receive from the reverse mortgage and the amount borrowed.”

Read the full article at WealthManagement.com.

Written by Alana Stramowski

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  • Financial advisors do not see the advantages of the HECM line of credit option wherein the unused LOC increases about 6% a year which is guaranteed by HUD no matter what happens to the value of the home. I think the main reason they do not like reverse mortgages is because they do not make any commissions or income from recommending them. For those FA’s who manage the money based on a % of the investment portfolio, they appear to not see that the portfolio can remain and grow if their clients use tax-deferred cash from a reverse mortgage.

    • Head Goon,

      Proceeds are not deferred cash. They are cash which is contingently taxable as capital gain at loan termination.

      As to financial advisors and asset managers, you bring an all too familiar picture. Quite frankly, it is extremely difficult for an asset manager to discuss the Standby Reverse Mortgage strategy with most clients. The reason is that most clients expect that the asset manager will return profits because of his advice and to talk about losses at all brings the question of whether the client has the right asset manager.

      Other financial advisors face the same issues except they are generally more removed from asset acquisition decisions. So they have more leeway to discuss strategies that mitigate loss.

      So while your application is is far too broad, it is still generally relevant.

      • Cynic –

        Could you elaborate on your statement, “They are cash which is contingently taxable as capital gain at loan termination.” It’s the “contingently taxable as capital gain” that I am interested in.

        Unless the pay off of the HECM loan exceeds the value of the home and taps into the MMI fund, there should be no capital gains tax issues. Perhaps tapping the MMI fund is the ‘contingency’ to which you are referring?

  • Sure their are fees connected with a reverse mortgage, just like there is on any mortgage. The difference is that with a reverse mortgage, if the need is there, the borrower has enough equity in their home and they intend to remain in the home for a long period of time, the closing costs become meaningless! Not only meaningless but normally they are included in the loan proceeds, which means the borrower does not have to actually come up with the closing costs by tapping into their savings account!

    The seniors achieve their goals in life and spread over many years the closing costs per year are minimal!

    Also, to come back on one statement made by “Head Goon”, financial advisors may down the road be able to collect a fee from their clients directly on a reverse mortgage, based a pending ruling by the DOT.

    However, getting to the main point of the article written by Alana. Each and everyone of us need to understand and know what a financial planer actually does for their client. We need to understand their world before we can educate them on our world.

    We have a product that can be of great value to a financial planer/advisor’s client. We can help them by aiding and educating them on our product and how it will fit in to their clients financial future planning.

    I am going to repeat myself, what comes first, the Chicken or the Egg, in this case, we must first get to know what the world of the financial planner is all about so we can speak their language! Remember, we are trying to sell them, not the other way around.

    If we do what I just laid out, we will find we can have a great opportunity out there with financial planers and financial advisors!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      It is hard for me to believe that you actually state that “…if the need is there, the borrower has enough equity in their home and they intend to remain in the home for a long period of time, the closing costs become meaningless.” Maybe that is because the borrowers do not know how much those costs will actually run them when paid.

      A HECM borrower with $8,000 in upfront costs with an average effective interest rate of 5% for a period of ten years would see those costs increase to $14,921.75. For a twenty year period, those same costs at the same interest rate would grow to $27.823.31 and for thirty years they would grow to $51,913.33.

      So please tell us when that $8,000 is not meaningful where the borrower intends to be in the home for the long-term and does not intend to pay off any of the loan balance until they move out and must pay it all. The trouble is just like all loan documents, the actual amount that will be paid for upfront costs is buried in the loan and is NEVER disclosed as a separate line item to the borrower. Instead, Congress stipulated that not only does the nominal interest have to be disclosed but so does APR (for adjustable rate HECMs, TALC). While rate disclosures are helpful to borrowers, seeing the actual cost of financing upfront costs would scare off many would-be borrowers.

      Financing upfront costs is in fact very costly especially when looked at by decade over several decades. While HECM borrowers have no idea how much financing upfront costs actually cost in total when they are finally paid in full, worse the great majority of HECM originators are just as blind to the actual cost.

      Now imagine how big those costs can grow to be when they are $18,000. Try $33,573.93 at one decade, $62,622.70 at two decades, and $116,804.99 at three decades. Try it using your software, The costs mount much more quickly than most originators think. The sad thing is that borrowers never know how much the seemingly painless decision to finance upfront costs actually are.

      John, that is why I have difficulty with you using the word “meaningless” to describe how your borrowers feel about these costs when the conditions you describe are in place. This speaks of making poor financial decisions when you are economically at the mercy of lenders. Perhaps there are other ways to describe the feelings of borrowers about financed upfront costs. Perhaps using the concept of an obstacle shows a higher degree of care.

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