Besides the myths, misconceptions, and media misrepresentations of reverse mortgages, one of the most common criticisms of the loan is that they’re too expensive.
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To be fair, the federally insured Home Equity Conversion Mortgage (HECM) certainly has substantial upfront costs, most significantly the Upfront FHA Mortgage Insurance Premium (UMIP). The maximum upfront FHA premium for an HECM could be as high as $22,996.50 for a home appraised at $1,149,825 (the current HECM limit) or higher.Â
The real question is “HECMs are expensive compared to what?”
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A recent article from the online Canadian media outlet The Globe and Mail entitled Retirees in debt have found an expensive way to get relief grabbed my attention. This article is accurate and fair, but it does bring to mind the need for a discussion of the upfront and ongoing costs of reverse mortgages compared to the unique benefits the loan can provide. The real question is that HECMs are expensive compared to what?Â
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To answer this question let’s examine the costs or consequences of being cash flow constrained in retirement. Below are just a few examples.Â
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The Consequences of lacking cash flow in retirement | |
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Avoiding medical appointments or foregoing medications risking a more serious disease or condition.
| The emotional toll of financial distress can lead to depression, hopelessness, or in some cases even suicide.
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The inability to keep up with inflation where Social Security or other retirement accounts fall short.
| Becoming a financial burden on adult children who step in to help an aging parent meet their living expenses.
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Shortening the lifespan of retirement account balances by taking larger systematic withdrawals to meet expenses.
| Falling behind on property taxes (with an existing traditional mortgage) and risking foreclosure.
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Being unable to pay homeowners’ insurance premiums and risking potential foreclosure from the lender.
| Having to work far beyond your intended retirement age.
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Being unable to afford to travel to see children, grandchildren, or close friends.
| The lack of funds to make needed repairs and maintain the home reduces the property’s value.
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Having to drive an unreliable vehicle.
| Being unable to purchase healthful food instead buying more affordable but less nutritious food items.
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Being saddled with an ongoing mortgage payment only to pass the home onto children who may squander the money they inherit.
| A generally lower quality of life.
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Certainly, reverse mortgages are not a panacea for every older homeowner, but their upfront and ongoing costs are buying something intangible- peace of mind. The calculus of one’s desired quality of life in retirement compared to the costs inherent in a reverse mortgage should be the centerpiece of the decision-making process.Â
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For some, the question is (as one reverse mortgage professional aptly said) ‘What’s your Plan B?’
6 Comments
Shannon,
As always you take a very timely and relevant topic and put it into its proper perspective.
Our parents old cliche of “don’t compare apples and oranges” is definitely in play here.
That being said, I have to take a strong position here.
Are Reverse Mortgages Expensive? Yes, they certainly are!!
The combination of the MIP, origination fees and standard closing costs in the state they are originated, make them the most expensive loan in the mortgage industry.
I don’t think it is wise for the industry to try and hide or defer, or “explain it away” this fact to the public.
It is just another huge weapon for our detractors to use against us, and they will!
Is it much more expensive that a zero-point Fannie Mae fixed rate? Of course it is!!! It’s literally 4 times the cost. (if standard origination fees are charged) How can we not admit that???
The real question is, is the Reverse Mortgage worth the extra cost?
And the obvious answer is, “damn right it is!”
And here is why… (I’m not going to say why. You and your readers already know why)
Is a Corvette much more expensive than a Pinto? Of course it is, and here is why…
Is a 4-bedroom house more expensive than a 3-bedroom house? Dame right it is…and here is why.
Is heart surgery more expensive than getting a cavity filled? Damn right it is.
The Reverse Mortgage changes our clients lives and that is why it is worth the extra cost. That is the message we should be screaming from the rooftops.
Boom!
Good points, Michael. Thank you.
Brilliant examples!
Thank you, Julie!
These are excellent points, Shannon. I enjoy your show. I would only take issue with the comment about “children who may squander the money they inherit”. There are plenty of responsible heirs out there who buy their first home with inheritance or otherwise invest it prudently.
Thank you, Mary Anne! There certainly are a lot of responsible heirs.