Product education is a major focus of reverse mortgage companies, and a major focus of the industry’s educational efforts in recent years has been focused on the financial advisor community. When advisors have an aversion to the product category, it’s the industry’s hope that additional information about reverse mortgages can help them to “come around” to the idea of recommending the products to clients.
In a new article at The Street, one financial advisor describes how looking deeper at reverse mortgages helped him to see that the category could be of material help to seniors in or near retirement.
“Much like my former disdain for all annuities, I was also opposed to reverse mortgages, mostly due to the horror stories I heard or read about unsuspecting seniors getting swindled and losing their homes at the eleventh hour of life,” says Doug Buchan, Certified Financial Planner (CFP) with Buckingham Strategic Wealth in Mount Pleasant, S.C. in his article. “Like any good narrative, pockets of this reflect fact, but also like many popular narratives, exaggeration and misinformation abound.”
One of the major reasons that Buchan sees reverse mortgages as potentially beneficial is because of the way that Home Equity Conversion Mortgages (HECMs) can be directly compared to Home Equity Lines of Credit (HELOCs), he says.
“Unlike a traditional HELOC, if you do tap the HECM, you are not required to pay any of the loan back (as long as you live in the home),” Buchan writes. “And, while that’s a lovely benefit, the biggest – and most powerful – difference is that, unlike a HELOC, the amount of money you can borrow from your home [with a HECM] grows every single year at a compounded rate. It’s this increased borrowing power that makes this strategy special.”
There are also several misconceptions about the reverse mortgage product category addressed by Buchan in his piece, including the often-circulated ideas which say that reverse mortgages are “only for poor people;” “the bank can take your home;” or that the upfront fees associated with a HECM make such products a “bad deal.”
“While the reverse mortgage could serve as a last-minute stopgap for folks who are quickly running out of money, it’s the people who have ample money today that can take the fullest advantage of this solution,” Buchan says about the misconception regarding less wealthy people.
Similarly, when it comes to the lender taking the borrower’s home, Buchan doesn’t see a risk of that as long as a borrower keeps their loan in good standing, he says.
“I simply don’t see a cause for this concern,” he writes. “In fact, a HECM can actually protect you from losing your home by funding a bucket for future property taxes and homeowner’s insurance.”
The concern that kept him reverse mortgage-averse was the one about the upfront fees, but he changed his mind when he discovered that there are two key protections a reverse mortgage can provide which can override the concerns about upfront costs, he writes.
“As we know, there are many risks out there in life,” he writes. “As a financial planner, I focus on the financial risks. Risks such as market risk, inflation risk (or purchasing power risk), long-term care risk, longevity risk and even deflation or disinflation risk. We need weapons to combat such risks. The HECM is fabulous at protecting not just one but two of the [aforementioned] risks: longevity risk and potential home deflation or disinflation.”
Read the article at The Street.