Reverse Mortgages: Part of a Process, Not a Product

Reverse mortgage professionals frequently run into the perception that the products themselves are simply “bad” — either based on a potential borrower’s experience with the loans in real life, or through decades of media coverage. But one financial planner says it’s best to abandon the idea of the Home Equity Conversion Mortgage as a “good” or “bad” product at all, and reshape the question as a matter of process.

“Far too often, people spend all their time thinking about products and outcomes,” financial planner Stephen Kelley wrote in the Lowell (Mass.) Sun on Monday. “I believe this is a sure road to failure.”

Kelley, of Safety First Financial Planners in Nashua, N.H., writes that too often, clients lose sight of the larger retirement-planning picture when focusing on a particular product’s public reputation — particularly with reverse mortgages and annuities, both known as products that financial planners frequently recommend but which have suffered negative reputations.

Advertisement

He gives the example of a 64-year-old man who makes $16 an hour in a “manual job,” and will eventually need about $2,000 per month in retirement.

The man owns a $225,000 house with $80,000 in remaining mortgage payments, along with some rental income. To get him to his $2,000 per month goal, Kelley recommended delaying retirement until age 70 to ensure a larger Social Security payment, as well as taking out a reverse mortgage to tap into his existing home equity. And that’s where the trouble began.

“He mentioned a friend had urged him to start receiving Social Security right away, or else he could ‘lose’ his benefits. “His friend was also quick to point out how ‘bad’ reverse mortgages are, and how he should avoid them at all costs,” Kelley writes, adding that the client also worried about not having any money remaining after the reverse mortgage loan was repaid.

Kelley challenges these misconceptions by putting a wider lens on the man’s retirement picture. Why look at Social Security as an immediate-winner-take-all cash grab when the entire point is provide a steady income throughout retirement? And why worry about eventually repaying a reverse mortgage if it makes sense for this particular man’s senior years?

“My response: So what?” Kelly writes of the reverse mortgage concern. “He has no kids and never married. He wants to live in the house until he can’t anymore. And while he’s living, his number-one issue is cash flow. These needs are supported by the reverse mortgage — in fact, all of these are exactly what they were designed for.”

Kelley closes by challenging readers to question conventional retirement wisdom and focus more on their individual retirement goals.

“Ask yourself what outcome you are looking for. If the products being suggested support that outcome, and that outcome is really what you want, go for it,” Kelley writes. “After learning everything you can about it, of course.”

Read Kelley’s full piece at the Lowell Sun.

Written by Alex Spanko

Join the Conversation (1)

see all

This is a professional community. Please use discretion when posting a comment.

  • Mr. Kelley makes sound points and some not so sound.

    Mr. Kelley notes that the client is 64 with a home worth $225,000 which is collateral for a $80,000 mortgage. He states the mortgage payment alone is $550 per month with 17 years left on the mortgage which means its has a 4.216% interest rate. The problem is Mr. Kelley claims the borrower will be able to pay off the existing mortgage with the HECM and still have $33,000 to spend without indicating the expected interest rate he is using. If it is 5.06% or less, then there is about $7,600 in financed upfront costs.

    Mr. Kelley is saying that the borrower should treat the HECM as a negatively amortizing mortgage and make no mortgage payments. It is unclear why the client should not make any mortgage payments on the HECM. Does the answer lie in the fact that Mr. Kelley may be recommending a fixed rate HECM? Clearly the accruing total costs on a HECM will exceed, the interest rate on the existing mortgage.

    Where the client is absolutely right and Mr. Kelley is off is when the client questions selling the home and having nothing left over. It is clear he has not delivered a clear Medicaid strategy to the client if medical concerns drives the client out of the house when the HECM balance due is almost equal to the value of the home. In the long run, not having that strategy in place could mean moving late in life to a facility NOT to the liking of the client.

    It is clear Mr. Kelley lacks a thorough holistic training in retirement/estate planning. That is generally the case when the only credential is a CSA. Rather than providing the client with more than one option, it seems Mr. Kelley does not provide options with an assessment of risk for each. It is unclear how if the $33,000 he had left from his principal limit would be sufficient to make up for lost earnings, if he had to quit work three or more years before reaching 70 years old. $550 per month in mortgage savings may not create sufficient reserves, if that is in the retirement plan.

    Some might be concerned about inappropriate disclosures if the retirement plan were fully disclosed; however, many times skilled presenters change the facts without providing the facts needed to identify the client and without distorting the impact of the overall plan and retirement strategy.

string(94) "https://reversemortgagedaily.com/2017/08/07/reverse-mortgages-part-of-a-process-not-a-product/"

Share your opinion

[wpli_login_link redirect="https://reversemortgagedaily.com/2017/08/07/reverse-mortgages-part-of-a-process-not-a-product/"]