Huff Post: A Three-Step Strategy for Reverse Mortgages

Reverse mortgages may be more appealing to seniors now that the Home Equity Conversion Mortgage (HECM) program has made a number of changes to the product. But there are still many senior homeowners who are scared of making a mistake with their home equity or being taken advantage of by unethical loan providers, according to a recent article published by The Huffington Post.

To combat these fears, homeowners should embrace a three-step strategy to determine if a reverse mortgage is right for them, explains Jack Guttentag, professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, in the article.

Step one, he writes, is for homeowners to identify their financial needs that could possibly be met by a HECM. Depending on which group a senior homeowner may fall into will determine how a reverse mortgage may be the most useful for their specific situation.

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“I have found that they [seniors] fall into five groups that have different financial objective,” he says in the article. “Each of these groups requires different information to make a good decision.”

Step two is to determine whether the amounts you can draw with a HECM immediately or in the future justify the decline in home equity, while the third step for the homeowner is to narrow the selection by comparing different lenders.

“The important points are, first, that no matter what financial category a senior falls into, a decision to take a HECM reverse mortgage or not should be data-based and include information about what is likely to happen in the future,” Guttentag says in the article.

Read the full article on The Huffington Post.

Written by Alana Stramowski

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  • Jack is a great reverse mortgage advocate but he rarely provides sufficient information to determine if his options are optimal.

    For example, Jack writes: “On September 3, the monthly payment on a HECM that would have resulted in the lowest debt after 15 years was $939. At current rates, she would owe $253,000. Assuming that Jones considers this a good deal, she should proceed to Step 3 and see if there isn’t another deal that would be more advantageous. Among the possibilities is a tenure payment of $1161 that would generate a debt of $364,000 over 15 years. It is for Jones to decide whether an additional $222 a month was worth an additional $111,000 of future debt.”

    If we had total financed upfront costs and the expected interest for the lender he uses to come up with his $939 monthly tenure payout, we could assess if a 15 year payout would have provided a better cash inflow and projected balance due result.

    If Jack is right, his five group categorization of seniors by needs could go a long way to helping with the targeting of HECMs to large group needs. Unfortunately we find no evidence of this categorization other than the anecdotal statements of Jack.

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