What Financial Advisors Should Understand About Reverse Mortgages

So you’ve met with your family, talked with your friends and finally made the decision to proceed with the reverse mortgage.  After weeks, or even months of deep thought, your mind is made up.

You meet with a reverse mortgage expert, complete the FHA required counseling and the application is started.

Reverse mortgage loan application

During the application process, your loan originator recommends you talk with your financial advisor about your decision.  When you call to talk with him for advice, you’re surprised to learn they don’t know much about the reverse mortgage.

The FHA insured Home Equity Conversion Mortgage (HECM) was signed into legislation by Ronald Reagan in 1988.  Since then, just over 1 million senior homeowners have entered into a government insured reverse mortgage.  That might sound like a lot of people, but compared to the forward mortgage market – it’s just a fraction of total mortgage volume.

Ok, Ok…..so what’s my point?  Financial professionals don’t deal with reverse mortgages very often.  This isn’t a bad thing, it’s just they’re not able to stay up to date with all the program changes.  There are lots of moving parts with the reverse mortgage and there have been substantial changes made over the last 3 years.

But Eric, you STILL didn’t make your point!!

Here’s my point….There needs to be more education.

For the last 10+ years, I’ve been speaking to large groups of financial advisors, accountants, attorneys, real estate agents (and just about any other profession you can imagine).  It still amazes me how much FALSE information is floating around about the reverse mortgage – especially within the financial services sector.

I want to address a few of the most common issues I deal with daily, and hopefully shed some light on why financial professionals should change the way they view reverse mortgages and their recommended usage.

Issue #1 –  Recommending that a client “wait” to do the reverse mortgage.

It still surprises me when I hear clients being told to use the reverse mortgage as a “last resort”.  I don’t understand why it would be suggested/recommended that cash assets are used first, before considering the reverse mortgage.  The equity in the borrowers home is an asset; it just normally can’t be accessed unless the property is sold.  With the reverse mortgage, the borrower gets access to some of that equity AND they get to remain in the home.  A win-win scenario for people that want to remain in their house (emphasis on “people that want to remain in their home”).

Issue #2 – Recommending that a client keep their “conventional” mortgage for the interest tax deductions.

Reverse mortgage interest deduction

Very generally speaking, the interest paid on a “forward” mortgage MAY be tax deductible on a borrowers tax returns.  I’m ABSOLUTELY not a tax professional, so please consult with one (don’t take my word for it).  But assuming the interest paid IS deductible, how much of a tax benefit is it even going to provide to someone that’s probably already in a very low tax bracket (depending on their income sources)?  The reverse mortgage ELIMINATES the principle and interest portion of a borrowers mortgage payment.  So while they may no longer get the interest deduction in that given tax year, they’ve eliminated the monthly expense of the mortgage payment (which is far greater than the deduction they would’ve realized).  And it should be noted, the interest deduction isn’t “lost” when a borrower does a reverse mortgage; it’s just delayed until the end of the loan when the balance is paid in full.  This benefit could also be realized by a borrowers heirs and/or estate in the event of the homeowner passing away.

And just because I know I’ll get 257 emails and voicemails in reference to this, I’m going to say it one more time:

“I’m not a tax professional.  Please consult with your personal CPA and/or tax professional”.

Schew.  Those “I’m not a tax professional” disclaimers always wear me out.  🙂

Issue #3 – Recommending that a client sell their house, rent somewhere, and live off the cash proceeds from the sale.

Just like my prior “I’m not a tax professional” disclaimer, I’m going to state another one:

Not everyone can afford to stay in their current home, nor should they.

That being said, assuming the borrower can afford to stay in their home, the reverse mortgage might be just what the doctor ordered.  About 85% of our clients that are researching the reverse mortgage currently have a mortgage payment.  As a matter of fact, eliminating their monthly mortgage payment is the number 1 request I hear.  It normally sounds like this:

“Eric, I don’t need any extra cash from the reverse mortgage.  I just need to eliminate my current payment.  If I don’t have that expense, my life is a thousand times easier”. 

Reverse Mortgages free up cash flow for living expenses

My clients are normally doing “okay” financially when they’re referred to me.  They’re paying their mortgage just fine, but there’s not a lot left over at the end of the month.  The best quote I’ve heard yet came from a client about 10 years ago. She said “there’s just a little too much month left at the end of my money”.  I always loved that quote, and I hear some variation of this from the majority of people I assist.

Ok. My point.  Here it is…..

Before recommending that someone should sell and rent the house they don’t really want to leave, the reverse mortgage should be considered.  The reduction in monthly outgoing expenses from the elimination of the mortgage payment might be just enough to allow them to age in place; in the home they love.

For those that can’t afford to stay in their home (even after the reverse mortgage is complete), they may want to consider the HECM for Purchase.  This will allow them to sell their current home and downsize to a more affordable house without incurring a new monthly mortgage payment.  AND it also gives them the ability to keep a large portion of the sales proceeds in their pocket.

Click here to learn more about the HECM for Purchase program.