The idea of a senior using a reverse mortgage product to fund his or her retirement is too risky a proposition, and is erroneously sold as a “financial easy button” that betrays its real status as a very complicated financial product. This is according to global investor and author Kenneth L. Fisher in a column appearing in USA Today. However, one reverse mortgage industry expert finds issues with Fisher’s stated points.
“Be careful. Read the fine print,” Fisher warns. “This isn’t money you lend yourself. It’s a loan using your home equity as collateral. That means interest, typically at a high rate, plus other fees and costs. Worse than paying that interest monthly, it compounds, magnifying what you owe. When you sell, you repay the principal plus all compounded interest.”
Saving in younger years
While the goal of saving in a person’s working years that Fisher lays out is one that should be sought after, the goal as stated in Fisher’s column doesn’t acknowledge the realities faced by many retirees, says Reverse Market Insight President John Lunde.
“[That goal] doesn’t really deal with the reality of the situation for many,” Lunde tells RMD in an email. “His advice is good for those still working and young enough for compounding returns to work their magic, but those already retired with little or no savings outside home equity can’t do anything with his advice at all.”
Because retirees require their finances to be both simple and available through the remainder of their lives, a reverse mortgage transaction fails a key requirement of simplicity and features a number of other complicating factors that can make retirement more difficult for seniors, Fisher writes.
“Elderly retirees need their finances to be simple, clear and available until they die,” Fisher says. “Reverse mortgages’ ballooning costs can cut against those basic needs.”
Constructing a hypothetical scenario in which a senior borrows $2,000 a month for 10 years, Fisher extrapolates that the majority of the amount owed after 10,20 and 30 years after origination is primarily in interest.
“The majority is interest. The longer, the uglier – until your home’s entire value is the lender’s.”
Fisher’s points about interest are correct, but they also come with a drawback relating to the potentially longer life of a borrower, Lunde says.
“While living longer than anticipated could result in the reverse mortgage interest accumulating to a larger total, it won’t cause the borrower to lose ownership or use of the house – a key advantage of reverse mortgages against other mortgage types,” Lunde says. “And even better, if a tenure payment option is selected the borrower will continue to receive monthly cash flow from the reverse mortgage no matter how long they live in the house. That option isn’t mentioned at all.”
While Fisher’s column also makes mention of the work of Dr. Wade Pfau in combating many of the common misconceptions critics have about reverse mortgages – even linking to a recent article authored by Pfau – leveraging the potential benefits of a reverse mortgage can be limited to seniors with a keen understanding of the intricacies of investing, Fisher says.
“[Some argue] reverse mortgages can insure against depleting your savings before you die, working alongside an investment portfolio. They can,” he writes. “But it requires the elderly to invest well. Are you a strong investor? Will you be? Are you willing to risk being forced to sell your house late in life to cover a ginormous compounded interest debt, hoping there is enough left to live off of? At an age when most people need simplicity and ease, this seems unwise.”
Looking at the interest in this way is shortsighted, says Lunde.
“He seems to misunderstand when repayment is required on a reverse mortgage, not realizing that the accumulated interest is not required to be paid in cash until the borrower passes or leaves the residence,” Lunde says.
Ultimately, the recommendation for having a longer-lasting set of assets to draw from in retirement comes down to remaining wary of any product charging fees for something that can already be done with “cheaper, more simple investments,” Fisher says.
“If you’re younger, save now and invest in your 401K, reaping compound growth’s rewards rather than having them work against you,” writes Fisher. “Stay invested throughout retirement without excessive binge-type withdrawals, and you should readily cover normal late-life expenses. More security, less debt. Wouldn’t you rather have that control?”
Education is key
While not disputing Fisher’s credentials as a financial authority, the writer doesn’t seem to fully comprehend the ways in which a reverse mortgage can be used by borrowers, nor does he demonstrate a full grasp of the way the repayment obligations work, Lunde says.
“Altogether, he seems to misunderstand the basic terms of the reverse mortgage repayment requirements and miss one of the key benefits of the product: keeping ownership and use of the primary residence without requiring any repayment until the borrower passes or moves out of the primary residence,” says Lunde.
Overall, the answer to solving these misconceptions on the part of Fisher lies in greater education about the intricacies of the product, Lunde says.
“The author is a longtime investment business professional and highly successful if the Forbes 400 list is to be believed,” says Lunde. “In this case he’d be well served to further educate himself on this product adjacent to his field of expertise and take another draft on his opinion piece with a more comprehensive understanding of the repayment requirements.”
Read the full article at USA Today.