Here at AgingOptions we’re always researching the subject of retirement planning. It’s a fascinating and complex field, one that seems to change every day. Sadly, however, one thing that does not change is the prevalence of bad advice, and one area where we seem to see a lot of bad advice is under the heading of reverse mortgages (also called Home Equity Conversion Mortgages).
Recently we came across an example – a one-sheet handout from a retirement planning website, called “25 Ways to Use a Home Equity Conversion Mortgage.” While about half of the suggestions might make sense as legitimate reasons to consider a reverse mortgage, in our view a significant number of their recommendations are completely wrong. These bogus suggestions reflect the kind of erroneous and shallow thinking that can quickly get homeowners into deep financial trouble from which they may never recover.
By now just about everyone knows that a reverse mortgage is a financial instrument by which qualifying homeowners age 62 and older can tap into the equity in their homes without having to move. Fortunately in our practice we have the privilege of knowing and working with some exceptionally experienced, completely ethical reverse mortgage advisors (including frequent radio guest Laura Kiel) whom we can recommend without reservation. But because reverse mortgages are complex financial instruments, manipulation and misinformation are all too common in the industry. “I want to send a message,” says AgingOptions’ Rajiv Nagaich, “that unless you are dealing with a very ethical person, sales people will take full advantage and sell you this product for the wrong reasons.”
First, however, what are some of the right reasons? On the “25 Ways” handout we saw some recommendations we support. For example, a Home Equity Conversion Mortgage (or HECM) can be used to pay off your existing mortgage and eliminate a house payment. It can finance home repairs and renovations that will allow you to age in place, something nearly all seniors say that hope to do. A growing line of credit obtained through your HECM can also safeguard your financial security for the future, and for some investors a reverse mortgage can help protect assets in the event of a future stock market downturn.
As Rajiv Nagaich puts it, while there may be some exceptions, “The purpose of the reverse mortgage should be to help you stay in your own home – nothing more.” When you are considering whether or not to take out a Home Equity Conversion Mortgage, you should make certain this is your number one goal and motivation.
So if these are the “good” reasons, what are some of the “bad” reasons? A few really stood out on the “25 Ways” list. For example, more than one of the suggested reasons why a reverse mortgage is beneficial involves using the proceeds to cover monthly expenses. We can’t support this notion. “If you are having difficulty paying regular bills,” warns Rajiv Nagaich, “then taking money from the last asset you have left is not a good idea.”
What about using the proceeds to benefit someone else? One recommendation was to use HECM funds to pay for a grandchild’s education. Another was to use the money to help your adult kids with family emergencies. Rajiv Nagaich calls this “bad, bad advice.” He adds, “There are always exceptions to the rule, and if you are sure you will get the money back then you can make that call. But generally, you should not loan money you know you will need for your own future needs.” Remember, your home is almost certainly your largest asset by far, and if you squander that equity, you may find you have too little left to live on.
Some of the ideas on the “25 Reasons” list were factually wrong, including the suggestion that a reverse mortgage would allow you to “combine proceeds with the sale of your current home to buy a new home without a mortgage.” This is erroneous advice. When we asked reverse mortgage expert Laura Kiel for her assessment of this scheme, she stated emphatically that “There is a mortgage on the home. It’s a reverse mortgage, and it may not require monthly mortgage payments, but it is a mortgage.” So we say, “Borrower beware!” Those things that sound too good to be true usually are.
The last reason on the list of 25 may sound innocent enough but we’ve seen this kind of thinking get too many retirees into trouble. One reason to get an HECM, say these self-styled experts, is to “Have fun! Buy a new car, take a dream vacation, and enjoy your retirement.” We have nothing against retirees having a good time, but financing an indulgent lifestyle you can’t afford with the proceeds of a reverse mortgage is a bad idea. Come talk to us and we’ll help you find other ways to indulge yourself – to a reasonable extent – in your retirement years. Don’t use your home equity to do it!
So-called advice like this “25 Ways” sheet should serve as a warning that the only way to make certain you are getting the complete picture when it comes to a Home Equity Conversion Mortgage is to consult with a trusted professional like Laura Kiel. “Laura stands above the rest,” says Rajiv Nagaich. “She really helps people understand their true needs. She knows the advice she gives today will impact this person’s life in future. That’s why I recommend her with such confidence.”