L.A. Times: The “New” Reverse Mortgages Are Safe But Costly

The Los Angeles Times featured the so-called “new” reverse mortgage in its financial advice column over the weekend, describing the benefits but also offering several words of caution.

Liz Weston, a certified financial planner in Studio City, Calif., wrote that home equity conversion mortgages may be a good option in response to a nearly 90-year-old reader who asked whether the products were “too good to be true,” a common concern for many potential borrowers. Weston leads off the discussion by noting that HECMs previously “deserved their bad reputation,” but that recent changes — presumably the Financial Assessment and other tighter federal restrictions — have transformed them into a cheaper, less risky option.

Interestingly, despite the positive words, Weston also claimed that home equity lines of credit are typically better options for seniors, warning of the high fees associated with taking out a HECM. Weston closes her advice by laying out the counseling process, and raising the specter of potential scams.

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“While reverse mortgages have improved, some of the people touting them have not,” Weston wrote. “Investment salespeople and scam artists sometimes try to push over people into reverse mortgages as a way to come up with cash to invest in their schemes.”

Read the full column in the Times here.

Written by Alex Spanko

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  • Ms. Weston is opinionated but hardly a fount of information. It is clear that lines of credit can be more helpful if the borrower has a life expectancy less than the line of credit will be active. But such cases are rare.

    The biggest drawback on lines of credit is that their is no principal growth. Although the ongoing costs of a HECM can be dramatically higher than a line of credit, the line of credit has limited uses while a HECM with its line of credit has broader uses and more of them.

    With a HECM there is no such thing as a late payment until after the loan goes into the due and payable phase at the end of the HECM life cycle. Despite its higher ongoing costs, when properly planned for income tax purposes, the interest deductions can be a huge help throughout the life of the loan reducing the costs of this loan.

      • Mr. Schmille,

        Dr. Barry Sacks has written an excellent article on the deductibility of interest which was coauthored by several tax attorneys.

        Its weakness is that it was not written from an income tax planning perspective. Also it was written for the average borrower rather than for those who might use the information to a higher and more efficient use.

        In 2007, I covered the topic in a breakout session at NRMLA convention in San Diego attended by almost 300 attendees. During that same session an IRS retired estate attorney and friend covered estate tax issues.

        It would be far too hard to cover much in a comment. In 2010 at a meeting in Sun City West, AZ, I covered the topic for a friend who had over 200 former borrowers attend, one question proved the point of my being at the meeting since an attendee had a $200,000 increased income problem that year and by a careful analysis of his use of proceeds, composition of mortgage paid off, accrued 1) interest, 2) MIP, and 3) servicing fee set asides, his accountant estimated he would save about $72,000 in taxes between federal and state income taxes.

        You should explore this topic with competent tax planners who understand interest rules, reverse mortgages, and the allocation of repayments per the loan agreement.

  • Mr. Veale would you be kind enough to provide the title, etc., of the article by Dr. Barry Sacks. Also, I am interested in a referral to a State of Maryland Licensed Attorney with the education, expertise and experience with residential properties of Maryland with a jumbo reverse proprietary loan made December, 2006. Thanking you in advance for your assistance, I remain Very truly yours, Nancy A. da Kay

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