Prominent retirement writer Jamie Hopkins took a novel approach to tackling common reverse mortgage misconceptions for Kiplinger this week, formatting the discussion as a 10-question quiz.
The exercise covers such common topics as whether or not the lender takes ownership of a property associated with a Home Equity Conversion Mortgage, the non-recourse feature of the loans, and the potential benefits of setting up a reverse mortgage early in retirement.
“Very few retirees or their financial advisors, however, know much about how to properly utilize home equity in retirement planning,” Hopkins writes, noting that home values frequently represent the bulk of the average American’s retirement savings. “Since most retired homeowners want to live in their houses for as long as possible, tapping into home equity must be done thoughtfully and through a well-informed, comprehensive retirement planning process.
While most of the questions highlight the benefits of taking on a reverse mortgage in certain scenarios, Hopkins also provides a balanced look at some of the potential pitfalls.
“A big downside of using a reverse mortgage is that it is still borrowing,” Hopkins, a professor at the American College of Financial Services in Bryn Mawr, Pa., writes in the answer to a question about ongoing mortgage insurance premiums and interest. “First, you have upfront closing costs with a reverse mortgage, which include lender fees and a large upfront mortgage insurance payment. Over time, interest and mortgage insurance charges accrue based on the current loan balance.”
Hopkins advises prospective borrowers to read a report on the costs associated with HECMs from the Consumer Financial Protection Bureau.
“When compound interest is working for you when investing, it’s great. But when it’s working against you, it’s expensive,” he writes.
Check out the full quiz at Kiplinger.
Written by Alex Spanko