[vimeo id=”115810165″ width=”625″ height=”352″]
10 Reasons Not to Get a Reverse Mortgage
Last week Fox Business posted an article entitled “10 Reasons Not to Take Out a Reverse Mortgage” . Everyone loves a top ten list and one would think such a list from a well known business site would be rooted in truth. Unfortunately Fox’s post is neither fair or balanced and ironically the article is reposted from the money management site The Motley Fool. Two paragraphs into the article one can easily sense what is coming from columnist Peter Bennett stating ‘It’s a loan that seems almost to good to be true. That’s why it’s usually pitched on that fantasy-making machine, otherwise known as TV”. He then enumerates several of what he calls ‘aging TV stars. Let’s score Mr. Bennett’s ten points and see how he does.
1- High fees. The claim is that a typical 30 year mortgage only costs $3,000 versus up to $15,000 with a reverse. What he fails to mention is a typical mortgage amortization for a $165,000 30 year loan at 3.5 percent would have the borrower paying over $340,000 if they kept the mortgage to the bitter end. Upfront fees are one thing, ongoing costs are quite another. A typical mortgage still leaves the borrower exposed to possible foreclosure with monthly payments totaling nearly twice the original loan amount. A reverse requires no payments. Let’s give him half credit here.
2- Property taxes and homeowner’s insurance to pay. Yes… you must pay both in a reverse mortgage but he conveniently fails to mention you have the same obligation with a typical mortgage. A senior could avoid such obligations by renting but who wants that? Zero points.
Download a transcript of this episode here.
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19 Comments
I assume you have a written script you could send me on your answers to the Fox Business BS. One more major strike against truth and a major blow against seniors who are the one trusting these jerks. Why do you think they have taken this position first before the evaluated the program? Doesn’t make sense for anybody, but especially not FOX NEWS. Thank you. I intend to develop a Q&A for a flyer and include it in my handouts. Whatdoyathink?
Warren,
Thank you. Feel free you borrow liberally from the video transcript. There were quite a few comments on the post but I am now looking for the columnist’s work email as well.
……and NRMLA, our trade association’s response was????????
Sadly, articles such as that published by Fox feed the popular misconceptions about reverse mortgages, and the rebuttals get scant distribution and even less readership at the consumer level. We’ve got a LONG way to go…
Shannon,
We fully disagree on item 10; heirs may get MORE. Giving any points to item 10 insults all of us over 62.
The Sacks brothers, Dr. Salter, and Mr. Evensky along with Dr. Jerry Wagner ALL showed that heirs getting less was not necessarily the case at all. They show how an estate can grow with a HECM.
Yet there are many more ways to disprove the nonsense that heirs WILL get less. Look at the borrower who either uses proceeds prudently to pay off or down high interest rate debt or to avoid accumulating such debt directly or indirectly. The direct method is using HECM proceeds to do it and the indirect method is by applying decreased cash outflow from the payoff of all liens (no HECM required periodic mortgage payments) to such endeavors. Many seniors are seeing their limited cash flows eaten alive by debt payments. A reverse mortgage can allow seniors to pay off/down the worst kinds of recourse (or nonrecourse) debt which many times will leave more assets to heirs.
So simply concluding that all seniors are not using their proceeds to actively improve their estates is a slam against every one of us who are over 62 years old. Not all of us are really that dumb!!!!
Sorry to be quite so strong but I am passionate about how HECMs can improve the financial (not just cash flow) position of seniors who use HECM proceeds prudently.
(The opinions expressed in this comment may not necessarily be those of RMS or its affiliates.)
Mr. Warns,
Peter Bell is known for saying that bad press ebbs and flows. Few of us question that statement.
For years we have been reacting to this media statement and that. Like you I believe that (not just) rebuttals (but even retractions) accomplish little. As the saying goes: “The damage was done already.” Rarely can it get fixed and sometimes rebuttals backfire.
Like the hecmvet implies, favorable articles accomplish far more. Few have attacked the Evensky Standby Reverse Mortgage Strategy or the articles by Dr. Jerry Wagner or the Sacks brothers.
It is absolutely wrong to believe that the best way to play the press is by being reactive. It is much better to be both reactive and, more importantly, proactive. While we react, only occasionally are we proactive.
My apologies, I should have added the following caveat to my reply immediately above:
(The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)
Your comment is awaiting moderation.
Maybe if our trade association “got ahead of the curve” and used the media to explain just exactly how reverse mortgages work and how they compare Time Value of Money wise to forward mortgages we could not only educate a great many financial professionals, attorneys, cpa’s, social workers, boomers etc etc., but in the process make it more difficult for MISINFORMATION to flood the media.
The key is the “not-for-profit” status the association enjoys in that they can submit PSA’s to the media, (public service announcements), and oddly enough, they manage somehow, to seem to be the voice of authority on this subject….at least they should be…
They supposedly have a much higher likelihood of being published in the WSJ, Washington Post, Forbes,Fortune, Journal of Financial Planning, and trade journals for law and accounting.
We should demand better representation from our trade association.
hecmvet,
Even though some of your ideas are not just misdirected but absolutely wrong, it is your admonition that NMRLA should be doing more, far more is a great suggestion. It is about time we are not reactive but rather proactive.
One of the worst examples of TV ads for any media campaign that I have ever observed are those NRMLA ran for the so called Extreme Summit (no doubt it was extreme). If the money that was used to pay for those pathetic ads had been used to publish positive articles from leading financial planners, attorneys, CPAs, economists, and others, there might have been a far better and definitely LONG-TERM impact from the use of that money.
Who had the great idea to do such silly ads? Some at NRMLA demand that bloggers use their real names, how about NRMLA disclosing all of those within NRMLA and the industry who were involved in this inane endeavor? What a waste!!
We all must endure your obfuscation and condescension in order to benefit from the rare instances when you contribute positively to the discussion.
hecmvet,
Some say popularity contests exist in our industry. It is not my intention to win any such contests.
I do not believe in simplicity if truth and accuracy are sacrificed. When those who make their livelihood from providing debt, talk about their proceeds as income for the sake of simplicity, one can almost understand how the executives at Enron felt justified in promoting the idea that the debt they received should be shown as income in their audited financial statements. But the truth is loan proceeds are cash inflow and not income to the extent that debt is not forgiven.
If you are enduring me, your endurance somehow seems a little on the short side. But nonetheless, I appreciate the attempt
hecmvet,
While I sorta/kinda get the drift you are promoting when it comes to Time Value of Money differences between forward and reverse mortgages, a much better idea is for you to specifically elaborate on what it is you would like to see. For example, are you referring to 1) the so called growth in the line of credit, 2) the present value of term and tenure payouts by which the line of credit is reduced, 3) the growth in the balance due, 4) etc.
One huge problem with all but term and tenure payouts is the index portion of the note interest rate. Since no one knows what they might be in the future or when they might be seen, unless there is some strong general agreement of what they might be or what their average effective rate will be over a number of periods in the future, time value of money presentations are not as useful as we would like them to be.
Mr. Veale, we use the “expected rate” for a reason. With our fixed rate options we needn’t make any assumptions for Time Value comparisons. Time Value of Money principles are crucial to understanding reverse mortgages in my humble opinion.
hecmvet,
Happy New Year!!
When it comes to fixed rate forward vs. fixed rate HECMs, what Time Value of Money computations are you suggesting? Why are those comparisons all that more relevant or produce significantly better comparisons than simple discussions about the two different kinds?
Most of us know that on a fixed rate HECM, the “expected” interest rate and the note interest rate are the same throughout the loan. So in that case, the note interest rate can be used in all interest rate related calculations but that is not true when it comes to adjustable rate HECMs. Since the overwhelming HECMs currently being originated are adjustable rate, the rest of this reply only addresses adjustable rate HECMs.
Except for calculating the principal limit, certain set asides (along with their related amortization), tenure and term payouts (along with their related amortization), and the monthly growth in the principal limit for some older HECMs, absolutely nothing of any financial significance is actually computed using the so called “expected” interest rate. While we may estimate for illustration purposes that the average effective note interest rate is the “expected” interest rate, such may or may not be the case. We simply make assumptions (hopefully reasonable ones) to illustrate various aspects of a HECM.
Since the average life of a HECM has always been less than 10 years perhaps you can suggest an index which can be added to the HECM’s margin for illustration purposes which is more reflective of the life of a HECM than our current “expected” interest rate index. I have yet to see any stats on how far off, a HECM’s “expected” interest rate is from the actual average effective note interest rate on an adjustable rate HECM upon termination. With over 250,000 closed HECMs, that seems like a lacking stat. Do you know what that difference is on average and also on weighted average (using the average balance due over the term of the life of a HECM and their lives as the weighting factors)?
I would like to see an example of the comparison you reference.
hecmvet,
I am not trying to find fault but rather understand what it is you want presented when you say: “Maybe if our trade association ‘got ahead of the curve’ and used the media to explain just exactly how reverse mortgages work and how they compare Time Value of Money wise to forward mortgages….”
What is it that you believe should be presented in those media presentations?
You then go on to refer to NRMLA’s non-profit status and suggest that they do PSA’s. Normally that is not done for business associations, IRC 503(c)(6) tax-exempt organizations on messages related to products their members sell. Also even if NRMLA can do some PSAs, in larger metropolitan areas, those are normally done in time slots when audiences are the lowest.
The cost of a TV ad campaign using a TMV presentation would seem to be far too high to justify its use. But no matter what the cost factor just seems to be a huddle far too high to get over.
Shannon,
We fully disagree on item 10; heirs may get MORE. Giving any points to item 10 insults all of us over 62.
The Sacks brothers, Dr. Salter, and Mr. Evensky along with Dr. Jerry Wagner ALL showed that heirs getting less was not necessarily the case at all. They show how an estate can grow with a HECM.
Yet there are many more ways to disprove the nonsense that heirs WILL get less. Look at the borrower who either uses proceeds prudently to pay off or down high interest rate debt or to avoid accumulating such debt directly or indirectly. The direct method is using HECM proceeds to do it and the indirect method is by applying decreased cash outflow from the payoff of all liens (no HECM required periodic mortgage payments) to such endeavors. Many seniors are seeing their limited cash flows eaten alive by debt payments. A reverse mortgage can allow seniors to pay off/down the worst kinds of recourse (or nonrecourse) debt which many times will leave more assets to heirs.
So simply concluding that all seniors are not using their proceeds to actively improve their estates is a slam against every one of us who are over 62 years old. Not all of us are really that dumb!!!!
Sorry to be quite so strong but I am passionate about how HECMs can improve the financial (not just cash flow) position of seniors who use HECM proceeds prudently.
(The opinions expressed in this comment may not necessarily be those of RMS or its affiliates.)
The Hotel & Restaurant Association promotes negative publicity. They consider Assisted Living to be a growth area for their membership, and they would prefer Home Equity to be in reserve to pay for Assisted Living. They are dead against Using your Home to stay at home. They get more mileage in paying for planted bad publicity than they could ever get in honest advertising. We should question the honesty and background of the planted negativity.
John,
Your point is well taken although it does not seem to apply to this specific Fox Business post.
The nursing home association here in California also actively expresses its inherent dislike of HECMs because they feel seniors should be in their facilities rather than extending the period they are able to stay in their own homes. Again the issue is avarice over money that the Association feels should be going into the coffers of its members.
I live and work in the Nashville market, which happens to be the home and headquarters of Mr. Dave Ramsey. As we know, Mr. Ramsey is a self declared guru on the great financial tools for our American citizens. However he is “dead wrong on his comments on Reverse Mortgages and PreNeed Funeral Policies! And I can’t imagine why his advisors have not discussed “transparency” of his ties to a large Nashville based mortgage company, Nashville based Term Life Insurance marketer, and affilliation/proponent of “Good Growth Mutual funds. Perhaps some of the other Business Experts at Fox Business News have been drinking from the same well. In fairness to Fox, the other affiliates aren’t any better.