Bad Words: When even pros get it wrong
When I tuned into our local AM station and was aghast at what I heard. “So you both make about $150,000 a year and your mortgage interest payments would be about $16,000 a year. With your combined income that would place you in a 40% tax bracket so your interest deductions would save you about $7,000 each year in taxes”. I was shocked.
Here’s a ‘financial ‘expert’ with his own radio show misleading one of his faithful listeners who phoned in. The mistake is sadly a common one- oversimplification. A more accurate answer would have considered that caller’s standard deduction of $24,000 a year would make deducting home interest payments highly unlikely- unless they already had other significant itemized deductions.
This radio segment made me reflect upon some of the bad advice that I’ve heard given over by well-meaning originators over the years.
Often salespeople love to use simple anecdotes and solutions. No surprise as they often help close the sale. Here are just a few of the simple yet misleading explanations that have been touted for reverse mortgages:
- It generates monthly income
- It’s tax-free income
- You can live in your home for the rest of your life
- You can’t outlive the loan
- Your Lifetime Expectancy Set Aside will pay your property charges until you die
- The line of credit grows forever with no limitations
- You only need to have enough equity to qualify
- A HECM is a way to leverage your wealth
Regardless of our experience, it is always wise to reexamine the words we use when communicating with older homeowners, family members, and financial professionals. Are they accurate, confusing, or misleading? Will they create potential headaches in the future for the homeowner or our company? The answer truly depends upon the accuracy and clarity of your communications.
What misleading explanations of reverse mortgages are you seeing? Leave your comments below.
13 Comments
Great summation on “ALMOST ACCURATE” phrases used very often in our business. I prefer more accurate explanations. Thanks Shannon!
Thank you Jim.
“You can’t outlive the loan” If the terms of the loan are met, why is this statement not true…unless assuming a borrower might live to 151?
Good question…A borrower may not age out of the loan but they can and will outlive it IF they fail to meet the terms of the loan. It’s a statement that can lead homeowners to believe they can never loose their home.
I would add that I’m not too concerned about outliving the default maturity date (age 150). However, I am concerned for borrowers who will “outlive the LESA.” LESAs can, and will, run out, which is akin to outliving the loan. Older homeowners don’t suddenly have the funds to pay required property charges years after it was determined they didn’t.
Since the 2015 Financial Assessment requirements, I haven’t personally seen it, but that day IS coming. I hope we advised our borrowers that there is a finite amount in the LESA bucket. Remember, the LESA bucket grows just like a HECM LOC, but it’s growing slowly with these low interest rates. Additionally, the annual demands on the LESA are increasing as property charges are now higher in many parts of the country.
Excellent reminder, Shannon. That’s a really good start. So many common talking points are BIG compliance concerns like “no payment” or “the LOC is earning interest.” I’m still surprised how often I see “HECMs are tax-free.” (See any HUD-I in Florida)
We also must be careful making definitive statements when exceptions exist or when clarification is required. For example:
– A tenure is a “lifetime” payment
– You can always refinance
– We eliminate your mortgage
– Spouses now get to stay in the home after the death or incapacity of the last borrower
– Heirs will be able to payoff a HECM for 95% of the home’s value
Even the common explanation of non-recourse – “never owe more than the value of your home” – is incorrect. You can absolutely owe more than the home’s value at any time during the loan. Non-recourse simply means you (and/or your estate) won’t be responsible for a deficiency after a sale or a post-death conveyance of title.
Dan- thank you for these additional examples, especially non recourse.
Great article Shannon, what an important message to remember a corner of truth is not the full picture of truth. Here’s one that hasn’t been mentioned yet, “The lower the interest rate the better for the borrower”. That is not always true. Loan officers should look at the long term goals of the borrower. If setting up a line of credit sometimes a higher rate/margin will perform better over time.
Some clarification has to be addressed on the fact that a non borrowing spouse is not protected being able to remain in the home when a borrowing spouse is out of the house for more than 12 consecutive months.
Due to a nursing home stay
Shannon a follow up question to my previous comment.
What protection(if any) does a non borrowing spouse have in case the borrowing spouse dies in a nursing home that the have been in for less than 12 months
Fortunately, in May of last year, HUD posted ML2021-11 which expanded NBS protection for a due and payable deferral. For loans with case numbers assigned on or after 8/4/2014, an eligible NBS may be able to receive a deferral after not only the death of the last borrower, but also the incapacity (12+ month) of the last borrower (so long as other qualifications are met).
The reason I put this on my cautionary list is because there are too many caveats to say that spouses always get to stay.
Excellent reminders