Is a Reverse Mortgage a ‘crazy-butt idea’?

Advertisement

Don’t explore those options!

Reverse mortgage professionals are well familiar with Dave Ramsey’s dim view of reverse mortgages. When Dina, a caller to The Ramsey Show said she and her husband have no heirs and were considering a reverse mortgage Ramsey and his cohost reacted dramatically as if she said she was planning to light her hair on fire. 

“We don’t have any heirs. Can I do a reverse mortgage?”, said Dina. 

“What are you saying?!” replied co-host Jade Warshaw. “Where is that woman who called and said she listened to the show? What did you do with her?” Ramsey quipped. 

A recent Yahoo Finance column recounts how the call to one of America’s most popular financial talk shows played out. “Quit entertaining these crazy-butt ideas”, said Ramsey. 

Dina is a 59-year-old teacher who mere months from retirement was looking into options to finance much-needed renovations on their home stated that she and her husband were considering a HELOC or a reverse mortgage. 

Their reported combined annual household income is $158,000. Dina says she could pay off the mortgage by August with her projected savings and a $28,000 tax-sheltered annuity. 

“I’m exploring options”, Dina said. “Don’t explore those”, replied co-host Warshaw. 

Don’t explore options? Why not? Because Dave doesn’t like reverse mortgages? 

What’s unknown is how much household income they will receive after Dina retires or if her husband’s income will remain the same. What we do know is Ramsey tends to paint with broad brush strokes giving advice that may not consider the unique circumstances of each caller.

Here are some questions Dina may want to weigh on how to pay for her home renovations.

 

  • What are the tax consequences of cashing out the tax-sheltered annuity?


  • Would spending down savings to finance renovations leave them forced to cash out other financial accounts that could lead to penalties?


  • Having no heirs what’s the advantage of leaving a home that’s paid off?


  • How much cash flow is preserved by either paying off the mortgage balance or refinancing into a reverse mortgage?


  • Does Dave Ramsey understand that unlike a HELOC a Home Equity Conversion Mortgage’s ‘line of credit’ cannot be frozen or reduced should home values drop?


  • With an annual household income of $158,000 and unable to pay cash for repairs and renovations, what other debts make self-funding the project unrealistic? 


  • What are the opportunity costs of not considering a reverse mortgage?


    • A reverse mortgage may not be their best option, or it could provide the flexibility for Dina and her husband to further safeguard or enhance their retirement. 

    The point is if an advisor makes the blanket statement to ‘not consider other options’ the client may want to consider advice from another financial professional.

    ________________________________________________

    Watch the Ramsey Show episode segment

    [Yahoo Finance] ‘Quit entertaining these crazy-butt ideas’

    Advertisement

    Economist Claims Annuities ‘Safer” than HECM

    ePath 100K RM leads

    Syndicated Columnist Recommends Cross-Selling Strategy…with a Twist

     

    reverse mortgage newsJust as the reverse mortgage suffered much negative media coverage and hand-wringing from financial pundits, so have annuities. If an annuity sounds familiar to reverse mortgage professionals, it should. Annuities were the financial product most often associated with what many considered a questionable and unethical practice- the cross-selling of financial products investing the proceeds into annuities.Surprisingly, one columnist and economist recommends taking out a traditional mortgage and investing in an annuity.

    An annuity is a contractual agreement between an investor and typically an insurance company. A lump sum is invested and then can be ‘annuitized’ or paid out over a period of time, deferred until a later date for full withdrawal, or rolled over into another investment. There are four basic types: immediate, fixed, indexed and variable. An immediate annuity converts a lump sum premium investment into an immediate stream of payments over a specified period of time, usually over one’s lifetime. This is often referred to as a Single Premium Immediate Annuity (SPIA). A fixed annuity guarantees a declared interest rate. The indexed annuity is a variant of the fixed but credits interest based on the percentage growth tied to marked indices such as the S&P500 or the Dow Jones Industrial Average (DJIA). Variable annuities invest funds into mutual funds or other market investments that can be subject to loss of principle in many instances.

    Syndicated columnist Laurence Kotlikoff opens his column with the statement, “HUD fails to mention a clear-cut and, to me, far safer way, at least for older people, to tap home equity.” But is Kotlikoff’s ‘way’ truly a safer option? Let’s examine his suggestion more closely.

    “HUD fails to mention a clear-cut and, to me, far safer way, at least for older people, to tap home equity. This entails taking out a long-term fixed mortgage on your home and using the proceeds to purchase a fixed annuity payment.