Do Reverse Mortgages Transform Home Debt into an Asset?

Inflation is at its highest level since 1982

The latest inflation numbers are out and they’re downright unsettling, especially for retired Americans living on a fixed income. 

Last week inflation in the U.S. jumped to its highest level since January 1982. CNN Business reports the Consumer Price Index rose 7.9% in the last 12 months. The Bureau of Labor Statistics tracks consumer costs using what’s called a ‘basket of goods’. That basket is heavily influenced by housing and rental costs, food, and energy costs; each of which has skyrocketed in the last year. 

For example,

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energy costs have spiked 25% from February 2021 to February 2022. And that number does not include the 70 cents per gallon surge in the price of gas at the pump last week alone! 

The honest truth is inflation will be with us for some time and will not go away quickly. Prudent older Americans should prepare for a continued increase in the cost of living.

So how does a reverse mortgage transform mortgage debt into an asset? If you define an asset as a benefit to the borrower then it certainly is. If you use the accounting definition we find that a reverse mortgage is not an asset that offsets liabilities. However, what a reverse mortgage does provide is the asset or benefit of increased cash flow. 

A homeowner refinancing their existing traditional mortgage into a reverse allows them to stop making monthly principal and interest payments altogether. That’s why reverse mortgage borrowers never receive a payment book to submit regular payments or any payments whatsoever. Can they choose to make payments? Of course. And just like any mortgage, the homeowner must continue to pay property taxes and homeowner’s insurance to avoid defaulting on the loan.

What about homeowners with no mortgage balance? If they’re retired then they are likely living on a fixed income that cannot absorb the erosion of the dollar. When the cost of filling their gas tank increases by $50 in a month where will they find the extra money to make up the difference? What expenses can they realistically cut? Just how far are older homeowners willing to give up the things that give them the quality of life that includes as eating out, driving to visit family, or social engagements? At what point does paying off a mortgage become more important than one’s own happiness and sense of well-being?

Inflation is likely to worsen forcing many older Americans to become miserly or creative. The creative option is more widely available thanks to today’s low interest rates and high home values. However, with the Federal Reserve planning to enact a series of interest rate hikes, that window of opportunity is closing fast. Transforming mortgage debt into the asset of a loan with no required installment payments not only frees up much-needed cash each month, it allows the prudent to prepare for what may be one of the most tumultuous economic periods in American history.

Who will sound the alarm? Who will inform older homeowners that there are options to convert their housing debt into a non-recourse loan that doesn’t require principal and interest payments? Their financial advisor? How about their accountant? Will their mortgage broker who helped them refinance their loan 2 years ago enlighten them? Likely neither will. That’s where dedicated reverse mortgage professionals like yourself can begin reaching out to both homeowners and professionals alike before it’s too late. 

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How Inflation Hurts Retirees and How You Can Protect Yourself


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EPISODE #713
How Inflation Hurts Retirees and How You Can Protect Yourself

“If you’re on a limited or fixed income — as many retirees are — inflation can take a significant toll on your lifestyle and your nest egg.”- Geoffrey Johnson

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  • Dead Villager’s home with reverse mortgage turns into an eyesore

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Prepping for Inflation and an Uncertain Economy with a Reverse Mortgage

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Why reverse mortgages are more important than ever during economic uncertainty

Much damage has been to the U.S. economy in the last two years. The Covid-19 pandemic coupled with shutdowns, and central banks’ efforts to stimulate the economy have left the financial markets and world economies on the precipice of a deep recession or worse.

Just as economists in 2007 didn’t see the signs of the 2008 financial crisis, today most economists predict a “return to normal”. However, one man sees things differently. Ray Dalio, a billionaire investor who founded one of the largest hedge funds predicted both the 2008 housing and financial crisis and the fallout from the coronavirus pandemic.

On CNBC’s Make it Dalio warned that a new economic collapse is at hand. Such a prediction is not as far-fetched as one may imagine with Russia amassing troops for a possible invasion of Ukraine and China’s repeated threats to invade Taiwan. War is an expensive business. With inflation already at a 40-year high, Americans are now beginning to feel the brunt of price hikes and supply shortages. And should the Federal Reserve accelerate interest rate hikes, the financial markets are likely to fall leaving retirees in a precarious position.

Amidst this doom and gloom, there stands a glimmer of hope for older homeowners and retirees.

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The reverse mortgage. While generally dismissed and misunderstood reverse mortgages could be the saving grace for retirees who find themselves with diminished retirement savings in a market sell-off or pinched by inflation. How much equity are older homeowners sitting on? $9.5 trillion according to the National Reverse Mortgage Lenders Association and RiskSpan’s Reverse Mortgage Market Index. In fact, that figure surged by 8.3% in 2020 thanks to rising home values.

As one investor said, you only make money in markets you get out of in time. Financial professionals will tell you that attempting to time the stock market is a fool’s errand. But what about the timing of securing your fallback fund before home values fall?

Securing access to loan proceeds before you find yourself if a cash flow crisis is like buying an umbrella before it rains. That’s precisely what qualified older homeowners could do today by taking a reverse mortgage with today’s low-interest rates and high home values. Those with little or no outstanding mortgage balance can secure access to an open line of credit, which unlike a traditional HELOC cannot be reduced if home values should fall. Retirees then can take periodic withdrawals as needed either to offset the effects of inflation or losses in their retirement portfolio in a market sell-off.

Many chuckle at preppers or survivalists who prepare for a worst-case scenario; that is until a crisis hits. With today’s uncertain economy and the stock market poised for a reset, a reverse mortgage is truly a ‘loan of prudence’. Perhaps prepping for an economic crisis is the prudent course of action. Perhaps the days of treating a reverse mortgage as a ‘loan of last resort’ may no longer be in vogue. Even in a best-case scenario, those who’ve secured a portion of their home’s value stand to have financial flexibility stand prepared should hard times come.

What are your thoughts on using a reverse mortgage to prepare for an economic crisis and inflation? Share your comments below. [/read]

Inflation, The Silent Killer!

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Premier Reverse Closings

By Robert Intelisano, CLU, CSA, LUTF

The Google definition of inflation is: “A general increase in prices and fall in the purchasing value of money over time.  Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages.  A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.”

An example of inflation is the cost to cross the Marine Parkway-Gil Hodges Memorial Bridge.  When the bridge opened on July 3rd, 1937, the cost to cross the bridge was between 10-15 cents, depending on the type of vehicle.  The current cost is $5.09 by mail and $2.45 by E-Z Pass.

The Federal Reserve wants to keep inflation under the 2% benchmark.  Right now, inflation is running around 3% which is in the danger zone.  As per Barron’s, the FOMC (Federal Open Market Committee) released minutes from its June monetary policy meeting.  Fed officials signaled that interest rates would rise sooner and faster than Wall Street expected prior to the meeting, as inflation is rising at its fastest pace since 2008.

What does this all mean?  This means that if you are on a fixed income, your money will not go as far as it would during inflationary times.  This also means, if you have investments and/or money in the bank that is “netting after-tax” less than 3%, you are losing money (purchasing power).  These are important barometers that few people are paying attention to right now.

People have been cooped up (myself included) during the height of Covid-19 and many persons now have more spendable income.   A combination of inflation, the Suez Canal blockage, and higher demand for travel has skyrocketed travel costs in the past month.  Hotel costs in Miami Beach have risen 50% since the last week in June.  Rental cars are up 110% this year and are 70% higher since the pre-pandemic in 2019.  Oil prices could soon hit $100/barrel, which will also spike gas prices.

There are options where one can position assets to fight inflation or at least break even, as interest rates are likely to rise over the next 12-18 months.

-Shannon Hicks-

Now is the time to have a short conversation with potential borrowers about inflation. How is it impacting them? Does it change their retirement plans? What financial concerns do they have as a result? Inflation is not a selling point, but it’s certainly a reality. One where a reverse mortgage could potentially help.