“The numbers are worrisome. The typical 54- to 64-year-old with a 401(k) or IRA owns a median portfolio worth about $135,000 and more than a quarter of workers don’t have retirement savings accounts”, writes Chris Farrell in his column Is This a Good Time to Get a Reverse Mortgage in Next Avenue.
Considering the stark figures Farrell just cited the word ‘yes’ comes to mind. And the fact that homeownership for households 65 and older has risen to 81% according to the Harvard Joint Center for Housing Studies, would further bolster the argument that now is the time for many to at least look into a reverse mortgage. But many may not. It’s complicated. Laurence Kotlikoff, a Boston University economics professor and expert on personal finance and retirement planning explains. “I went from not liking them to thinking they aren’t as bad as I thought”.
So why are reverse mortgages not going mainstream, as many of us in our industry have hoped? Kotlikoff puts it this way. “I looked more carefully with our software, and it got me back to not thinking favorably about reverse mortgages,
It’s a complicated product to get your brain around. If you couldn’t come up with any other option to stay in the home, then use a reverse mortgage.” Farrell agrees.
Therefore in his upcoming book Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life, Kotilikoff suggests a number of alternatives to a reverse mortgage. A multigenerational home, renting out rooms on Airbnb, or a sales leaseback are just a few options he suggests.
What is a multigenerational home? The U.S Census Bureau defines a multigenerational home as a household that consists of more than two adult generations living under the same roof or grandparents living with grandchildren under the age of 25. Ironically, before the advent of FHA, government-backed financing, and suburban developments such an arrangement was the norm for millions of Americans.
A sales leaseback entails the homeowner selling their home to a family member or company, possibly pulling out some equity, and continuing living in it while making monthly rent payments to the buyer. Unlike a reverse mortgage, this strategy requires relinquishing ownership to another party. Renting a room or accessory dwelling unit on Airbnb sounds appealing but typically requires approval from local authorities, the ability to provide regular thorough housekeeping or to hire out cleans, a loss of privacy, and liability insurance.
Each of the alternatives to a reverse mortgage has its own wrinkles and complications. But let’s look again at why many see today’s reverse mortgage is complicated. One reason the Center for Retirement Research at Boston college cites is homeowners’ aversion to borrowing again, whether they have a low loan balance, and especially if the home is paid off free and clear.
The California Department of Real Estate’s brochure Reverse Mortgages. Is One Right for You says reverse mortgages are more complicated than conventional loans and that the consequences of the various plans and options offered in the loan are not always obvious? In fact, there are dozens of state and federal consumer publications that describe the loan as complicated.
While these are valid explanations for why reverse mortgages appear to be complicated, they ignore one obvious explanation that’s hiding in plain sight. It’s a counter-intuitive loan. As the name implies it flips the idea of a traditional mortgage on its head. That in itself is enough to give some pause, and that’s to be expected. But I would caution, what seems simple to reverse mortgage originators is often intimidating and ambiguous to others. Finding a way to bridge the homeowner’s basic understanding of their traditional mortgage works to how a reverse mortgage function differently is key.
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
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1 Comment
Tim Nelson
Great topic Shannon. I really have a hard time with this issue. I would say its an industry issue and the way we present the product. Why do we make it so complicated? It’s not a complicated product unless it’s presented that way. The reality is, its just a HELOC (assuming you dont use a fixed rate product) with options on how the borrower wants to take distributions from the line of credit. Most borrowers, Financial Planners, Realtors and Economists are familiar with a HELOC and in fact recommend the product to many retirees for the same reason we recommend the HECM. BUT, as we all know the HECM has so many more benefits and protections than what a traditional HELOC offers.
So, how do we as an industry un-complicate the product and presentation?
Why so many don’t consider a reverse mortgage.…
1 Comment
Great topic Shannon. I really have a hard time with this issue. I would say its an industry issue and the way we present the product. Why do we make it so complicated? It’s not a complicated product unless it’s presented that way. The reality is, its just a HELOC (assuming you dont use a fixed rate product) with options on how the borrower wants to take distributions from the line of credit. Most borrowers, Financial Planners, Realtors and Economists are familiar with a HELOC and in fact recommend the product to many retirees for the same reason we recommend the HECM. BUT, as we all know the HECM has so many more benefits and protections than what a traditional HELOC offers.
So, how do we as an industry un-complicate the product and presentation?