Inflation is at a 40-year high, analysts say the stock market is on track for its worst year since 2008, and interest rates are soaring. Bleak? Certainly for some, but even more so for retirees.
When times are good certain financial subjects are typically off-limits among financial pundits and columnists. A handful of these issues include that all debt is not bad, that not leaving an inheritance may be a good idea, and what to do with the largest asset most retirees own.
However, as the American economy slides into a recession and consumer purchasing power erodes many of these financial taboos may slowly die and they should. Hard times will force many to face the harsh reality that’s been avoided for far too long.
Taboo #1: All Debt is’nt Bad.
All debt is not created equal yet debt is often typecast as the villain of retirement. In some cases it certainly is. Seniors with credit card debt will find their required minimum payments increasing as interest rates rise. This not only slows down the eventual paydown of the credit card balance but hurts their credit score as their utilization ratio increases.
However, one debt is widely accepted and used by most. A home mortgage. Few have any issue in getting a mortgage during their working years and often strive to pay off the loan altogether by the time they retire. However, many older homeowners still carry a mortgage balance and a payment that puts a strain on their monthly cash flow, even more so with inflation. Where home debt is not widely accepted is the use of a reverse mortgage. While still a mortgage, a reverse mortgage does not require any monthly principal and interest payments. In fact, they’re voluntary!
When comparing debts the question that should be asked is what is the long-term benefit to the borrower? While credit card debt erodes cash flow and self-control in exchange for immediate gratification, a reverse mortgage can help dramatically increase cash flow for older homeowners who take the loan.Â
Taboo #2: It’s okay not to leave your kids an inheritance
Leaving a legacy is a noble notion but is it reasonable if it means reducing your quality of life? Often adult children place their parent’s comfort and quality of life over any expectation of receiving any assets upon their passing. Older parents can find comfort in using their own assets and savings to remain financially independent rather than feeling like a financial burden for their children. With this understanding, some have chosen to utilize a portion of their home’s value in a reverse mortgage to cover living expenses and health care costs.
Taboo #3: Maybe your home shouldn’t be paid off
If there’s one generational taboo that’s persisted it’s that one should always pay off their mortgage whenever possible. However, the harsh financial realities retirees face today begs the question, ‘to what benefit’? Is the equity in the home liquid or accessible? What happens if home values drop 20,30, or 40%? How does making mortgage payments for another 10-15 years in retirement improve one’s quality of life?
Yet the home remains the most significant asset for a majority of Americans, yet it’s typically completely ignored and treated as untouchable.Â
Reality has a way of stripping away our notions of what financial subjects are taboo or off-limits. Perhaps older Americans will embrace a more pragmatic view of debt, inheritance, and home equity in these difficult times.
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3 Comments
SHANNON THIS IS ANOTHER EXCELLENT ARTICLE. I’VE MADE A COPY OF IT AND HAVE PUT IT IN MY “SHANNON FILE”.
Thank you, Owen!
I do not agree.
Like 20 year olds, not all seniors are the same. Some 20 year olds have been working for several years, looking for their next opportunity. Others are biding their time to get to work until their senior year in college when they can interview for that job they have gone to school for. Some are looking at more years in education even after graduating college to reach their goals of being doctors, lawyers, and other professionals.
Seniors are also very different in their goals in retirement. Some have little need for more money. Some make very poor financial decisions and within months of obtaining a HECM line of credit have spent much of it on motorhomes, boats, new cars, etc. A few years after the start of the mortgage bust, I was sitting at a dinner following the memorial for the father of a close friend in the industry and quietly listening to his partner tell me how he was quitting the industry due to calls from prior borrowers who thought that their homes would continue to rise above the lending limit and instead watched their home values sink, wondering how they could get more cash to pay off their property charge obligations. He simply lacked the answers they demanded.
So can a HECM be a bad debt for some? The answer should be obvious.
In some cases it is only logical that seniors should not feel obligated to leave a financial legacy to children. Most believe they should and most likely are right BUT does that preclude them from obtaining a reverse mortgage as well? It depends on many factors but for those who have reasonable needs not being met in any other way, a reverse mortgage is a very reasonable answer as it is where parents with more than sufficient equity in the home feel demoralized, humiliated, and despondent when they must obtain cash from adult child just to make ends meet.
Like many major asset acquisitions, the acquisition of a home comes from personal assets plus debt. In financial terms, this is called leveraging. I have heard reverse mortgage originators claim that a reverse mortgage is NOT leveraging because it is paying off a mortgage. Well after the reverse mortgage is closed, is the home still collateral for a debt? Simply refinancing to a reverse mortgage does not change the basic nature of collateralized debt into something other than leveraging.
So in reading the article, I find its application to be only slightly limited BUT should that limitation result in the kind of low annual volumes of reverse mortgage closings that we have seen since 2009? In answering that question, one has to ask how many reverse mortgage closings in a year would indicate that the limit is exceeded? Imho, I have never seen a year when the closed volume of reverse mortgage has come close to touching that numerical limit.
Our potential market is huge. Why bog ourselves down with convincing those who cannot see things our way? “Overcoming objections” (i.e., pushing our views) can be useful BUT it can also turn seniors against the industry. Just be careful how far you push those you would like to serve. In this regard, we are our own enemies.