4. Dedication
This is dedicated to the many retirees I have worked with over these many years. They have
taught me how reverse mortgages really work in the lives of real people. Along the way
they’ve also taught me a lot about what it means to be old in America today.
I owe them my livelihood and the adjustments I have made in aging myself. More than
anything else I have learned we do not age alone. It is a common experience along a
crowded road. None of us ought to make it a solitary journey, and all of us travel in good
company.
5. Table of Contents
1. Foreword
2. Top 10 “No”s
3. Who
4. What
5. Where
6. When
7. How
8. Why
9. Why Not
10. Equity Security vs. Income Security: The Reverse Mortgage Dilemma
11. Afterword
About the Author
6. Foreword
The purpose of this book is not to explore how reverse mortgages work or to convince you
that getting one is the right thing to do. After all, I don’t know you, nor do I understand why
you are considering a reverse mortgage.
In order to decide if a reverse mortgage is the right choice for you at this time, you need to
understand how they work and what they will do. I have compiled this information about
reverse mortgages with an emphasis on you, on your needs, rather than on the product.
In this book I am sharing over a decade’s experience of working with hundreds of clients as
a Home Equity Conversion Mortgage (HECM) reverse mortgage consultant. I work with
clients not only as they are deciding and applying for a HECM, but also after they close and
are fitting the reverse mortgage into their lives. It is from working and talking with people
just like you that I have learned what I know about reverse mortgages.
One of the biggest mistakes most people make is spending too much time worrying over the
numbers and details. Where they should begin is exploring if it is the right choice and fit for
their lives. How a reverse mortgage works is not nearly as important as whether it will work
for you.
Each of us is different. The older we get, the more unique we become. Your retirement and
longevity prospects are entirely different than mine. So are your comfort levels and tolerance
for risk, debt, and belt tightening.
Mark Twain said, “If you can’t make 70 by your own road, don’t go.” I hope this book will
help you determine whether a reverse mortgage and you are heading in the same direction.
Sometimes, that isn’t easy to figure out. The better you understand why you are considering
this step, the more likely you are to come to a successful decision.
When I started in this business, most people considering a reverse mortgage were in
financial crisis, often from outliving their wealth. They were long in years and short on cash.
One client put it perfectly, “I’ve only made one financial mistake in my life: at 87 I’m still
alive but my financial advisor figured I’d be dead by 75.”
Today, most of my clients are far younger. Perhaps this is because we Boomers have learned
from the experience of our parents. We have also just gone through the worst financial crisis
since the Great Depression. Property and stock values, as well as the future generally, are far
less certain. I call it the certainty of uncertainty. After all, retirement is a journey that we take
not knowing how long it will be or what will happen along the way, but with the certainty we
won’t be coming back alive.
We are now looking into reverse mortgages far earlier in our retirement. Increasingly, they
are being seen as part of retirement income planning or as a way of better managing our
assets. That may mean using them to help insure against the economic risks of longevity or
simply as a way of insuring access to more of our wealth, now and in the future.
After all, the old paradigm of waiting for a crisis never was a very good idea. Crisis
management is an oxymoron. If you are in a crisis, it can’t be managed. That’s why it is a
crisis! The only way to manage a crisis is to plan ahead and avoid it.
So, the steps I’m setting out here are to help you evaluate whether a reverse mortgage fits
for you. No calculations, no numbers, and (hopefully) no lengthy sales pitch about how
7. wonderful these are. Just some simple tips to enable you to better determine what the right
step is for you now.
You have a right to know that I am a commission salesperson. I get paid for helping people
set up HECM reverse mortgages in Vermont and across the country.
I am absolutely convinced this product is a critical component of a strong retirement income
strategy. Furthermore, I believe setting it up as soon as possible offers the greatest security
and financial control over the longest time. So, I’m biased. These are my opinions. They
don’t represent the views of my employer or the reverse mortgage industry. Other
professionals may disagree with what I have to say, and you are encouraged to research this
thoroughly, as you should any financial decision.
Finally, I do HECM reverse mortgages. That is the only reverse mortgage insured by the
federal government through the Federal Housing Administration (FHA). Everything that
follows assumes that the HECM is the reverse mortgage you are considering.
8. Top 10 “No”s
Let’s start with something easy: my top ten list of things to avoid as you research whether a
reverse mortgage is the right step for you, a loved one, or a client. These are things so
completely inappropriate they should stop you in your tracks and send you elsewhere. They
are the “Easy ‘No’s,” because if you run into them, you are dealing with the wrong person or
company.
1. Pressure to make a quick decision or just trust the loan originator.
2. Unsolicited calls offering you a reverse mortgage (or any financial product). Also, too
many calls too often. Harassment isn’t sales any more than stalking is flirtation.
3. Being told you should not involve family or trusted advisors in the discussion or
decision about getting a reverse mortgage.
4. Being offered a better deal for an immediate decision.
5. If the loan officer wants to help you invest the proceeds from your loan.
6. Anyone who can solve your problem without having learned what your problem is.
7. When you feel uncomfortable about the person, information, process, or company.
8. Guarantees of approval or of what value your home will appraise for.
9. Someone who can’t offer you professional references.
10. A mortgage professional who minimizes or ignores your concerns.
Deciding not to do something can often be the easiest part. More complicated is the choice
of what to do and when. Help with that follows.
9. Who
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As in Dr. Seuss’s Whoville, there are more than a few whos to consider.
First is: Who is going to be involved in the decision? You are encouraged to reach out to
trusted advisors, family, and friends. However, you shouldn’t assume they know any more
about Home Equity Conversion Mortgage (HECM) reverse mortgages than you do. Steering
the conversation into why you are considering this step may be more productive than just
asking, “Should I get a reverse mortgage?”
Engage people in a discussion centered on why you are considering a HECM, not whether
you should get one. There is an old adage in medicine, “Prescription without diagnosis is
malpractice.” If you don’t deal with the cause, it’s difficult to make the solution relevant.
After all, when it comes to your finances, few choices can be adequately explored with a
simple yes or no.
Often people are quick to advise yes or no, but few are able to present alternatives. I’m
reminded of a couple who were considering a HECM because they couldn’t qualify for long-term
care insurance. Their accountant told them it was a horrible idea and way too
expensive. Hearing this, I asked what alternative he offered. “Nothing,” was the reply, “he
just said a reverse mortgage was a bad idea.” “Compared to what?” I asked. “Well, it did
seem better than a nursing bill I couldn’t pay,” replied the client.
10. Here is another: Who is going to be on the mortgage? If you are a couple and one of you is
over 62 years old and the other under, you face a real dilemma. All borrowers must be at
least 62.
Until this year that presented a serious problem for couples or partners where only one of
them was at least 62. Only borrowers could be on the loan. So the spouse or partner had to
quit claim his or her interest in the property for them to get a reverse mortgage. This is a
very serious step, and it resulted in lawsuits from surviving spouses who did not want to
vacate the property after the borrowing spouse died.
Fortunately, the Federal Housing Administration (FHA) is changing the rules in 2014. The
changes will take into account the younger spouse’s age in figuring the available funds. On
the death of the borrower, any available credit line will not be available to the surviving
partner. However, she or he will be allowed to continue living in the house.
Then there is the choice of Who to work with to get your reverse mortgage. There are lots
of ads on TV, sites on the Internet, offers stuffing your mailbox, you may even have been
called out of the blue by someone offering one.
My rule of thumb is to take your time. Avoid anyone who pressures you with too many
phone calls or emails. Look for a person and company you are comfortable with. Find out if
you are dealing with a lender or a broker. Who will be servicing your loan? Even if you have
spent a lot of time with one person or company, changing your mind and going with
someone else is perfectly appropriate. This is about you, not them.
Many people are surprised to find the choice of the loan originator can be more important
than picking the lender. After all, you may have called the TV ad with the friendly movie
star, but odds are you aren’t going to be dealing with the movie star.
The fit between you and the loan officer is important. That person is going to be critical to
you understanding your choices and the process if you apply for a loan. You need to feel
comfortable and confident that you are working with a reputable professional who is better
at listening than talking. Clever comebacks and quick closing strategies aren’t as helpful as
insightful questions and clear, understandable communication.
Many people who look into a HECM have the mistaken impression that I am working for
them. That is not true. Loan officers are employed by the lender and are working for their
interest. We are paid by the employer, not by you. That is true no matter how things look on
the Good Faith Estimate.
Don’t be afraid to ask how your broker or lender gets paid and what your relationship with
them will be, during the process and after the closing. I make between $1,500 and $7,000 on
each loan that closes. I tell every client how much I will be making and what my commission
is based on. With each person, I make clear my role during the evaluation, application, and
even after the closing. These are things you have a right to know. If someone doesn’t want
to share that information with you, what’s his or her problem?
One final thing about lenders: it is the FHA insurance that matters most. This insurance
protects you from changes in the promises even if the lender transfers your loan or servicing
or goes out of business.
In over a decade in the reverse mortgage business, I have seen a lot of lenders come and go.
Companies come into and exit the business. There are mergers and purchases. If you have
11. FHA insurance, none of that can change your mortgage deal because the federal government
insures it. The promises are recorded in your town or city clerk’s office.
Remember, you are not just looking for a loan, but for a loan officer you can work with. We
are talking about your house and the rest of your life; you have a right to have every one of
your questions answered clearly, thoroughly, and in a manner that leaves you confident in
the information. All of your questions matter and the only “dumb question” is the one not
asked.
That brings me to the last Who: Who is the most important person in the process? You are.
Things should go at your pace, in the manner you prefer. As you talk with advisors, family,
or HECM professionals, keep your interests in the forefront.
Of course your concerns reach beyond yourself. But if you don’t take care of your business,
it becomes someone else’s problem. There is a reason the flight attendant tells you to put on
your air mask first: that is the best way to make sure you can help others.
12. What
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There are basically two what’s. The first is What is it? The second is What are you trying to
accomplish?
What it is depends on your situation. A reverse mortgage has traditionally been seen as a last
step for senior citizens as they reach the end of their money. Home Equity Conversion
Mortgages (HECM) used to be aimed at that market, but the industry changed significantly
at the end of 2013.
Now, the cost of doing a HECM is five times less (based on the cost of the initial mortgage
insurance premium) for those setting up the credit line early. Other rules limit how much can
be drawn in the first year. Setting up your HECM earlier is often a better deal.
Traditional equity lines can be cancelled or called, depending on the terms of the loan. They
require interest payments for a portion of the loan’s duration, and then principal and interest
payments for the remaining term when they reset. The reset can cause a significant increase
in the monthly payment. And there is a firm date when all the money has to be paid back.
This usually doesn’t work as a retirement income strategy because of the uncertainty of the
availability of funds, the monthly payments, and the loan coming due at a point in the future,
when you will be older and possibly less able to handle the payoff.
A HECM can be a way to insure access to equity trapped in your house. A HECM can also
be used in different ways, such as to pay off a current mortgage or equity line, buy another
home, create a monthly income stream, or simply be a credit line available for future
expenses.
Because HECMs are insured with the federal government through the Federal Housing
Administration (FHA), you can be confident that the promises will be kept. FHA insurance
protects borrowers and their heirs from owing more than the value of the property at the
time of sale.
While that’s important, the greatest value of the FHA insurance may be that it also insures
the credit line so that it can’t be denied you, even if the bank goes out of business, property
values go down, interest rates go up, or you run into credit problems.
13. Is there a catch? Yes. You have to maintain the house as your primary residence and keep up
the property taxes and home owners’ insurance. As long as you do, the loan doesn’t come
due until the last borrower dies, sells, or moves.
There is a bonus most people (including many in the reverse mortgage industry and financial
advisors) generally don’t appreciate: the available credit line grows and compounds
independently of the value of the house, based on the cost of funds.
Basically, that means if you take out a HECM with a $200,000 credit line, in fourteen years
(if you don’t take any money and interest rates don’t change) you could have around
$400,000 available in your credit line, even if the market value of your house is then less than
$400,000.
So, when you set up a HECM early, it can insure access to the equity in your home. Since
the credit line grows independent of the property’s value, the liquidity of your house’s equity
is no longer coupled to the price of real estate.
What is the reason you are considering a reverse mortgage? Answering this can be tougher
than you might expect, because getting to the meat of that question means going deep and
long into places we sometimes avoid in our financial lives.
The first thing is to be clear about the math of your money. You’d be amazed how many
couples I talk with where only one of them knows the real situation but both are expressing
opinions. Everyone involved in the discussion needs to understand the numbers.
My lovely wife, Kelly, takes care of balancing the books in our marriage. (That’s because if I
knew how much money we had, I’d spend it.) When we have serious financial talks, she has
to do some reality checking to make me an informed partner in the conversation.
Issues such as legacy strategies, whether you have inheritable pensions, the aging-appropriateness
of your house, your health issues, and whether there is really enough money
in the 401K, no matter how long either of you live, are all part of the conversation.
Remember, for a couple 65 years old today, it is probable that one will live into his or her
80s and the other into her or his 90s, if not over a 100! We are living so much longer, many
retirees will actually live longer in the distribution phase than they worked during the
accumulation phase of their financial lives.
If it is a joint decision, then everyone needs to be able to have his or her concerns heard.
Sometimes, bringing in a third party to facilitate can be helpful. This can also be a good time
to bounce things off your financial advisor. Your choice may be harder than you expect.
Getting help is a good thing.
The conversation is made even more difficult because it is nearly impossible for us to
imagine ourselves really old and struggling on our own or caring for a declining spouse. Add
to that the economic unknowns of politics, Social Security, and Medicare, plus inflation, and
you have a tough mix of variables.
During a visit with clients, the wife of the couple was concerned about not having declining
health as they aged. Her husband brushed this off saying, “If I get that sick, I’ll just blow my
brains out.” She leaned over to me and said just loud enough so he could hear, “Oh sure, he
talks big now with his promises, but can I count on him later?”
14. That brings up the second and often more difficult conversation. What happens when there
is only one of you? The greatest benefit of a HECM can be to the surviving spouse. For
most of us, planning for such a negative outcome is just beyond comprehension. But if you
are going to make the best choice possible, you need to be able to evaluate the worst case
imaginable. After all, planning for the worst while expecting the best is about as optimistic as
we may dare to be in this crazy world.
Often a candid and open discussion is limited by our not wanting to worry a partner.
“Everything is fine now, but if you do the math, we are going to run out of money. I’d be
ashamed to tell her that.” The cold, hard fact is that we can’t shield each other from the
consequences of not facing things as a couple. If you don’t work on it together, one of you
will have to deal with it alone.
Looking at what is going on in your life and what the future may hold is key to an honest
approach to determining whether a reverse mortgage is an appropriate choice for you. You
didn’t create the world you are dealing with, but you can create the solution to what you are
facing.
So, the two Whats are: What is it? and What are you trying to accomplish, now and in the
future? Don’t be like the fellow who told me, “No one in my family has ever lived beyond 65,
so money will never be a problem.” That was my dad, and he passed well into his 80s.
Money was a problem. Expecting to die early isn’t a plan. Longevity shouldn’t be a penalty, it
should be a reward.
15. Where
Scott Funk
Where shouldn’t be complicated, but it is. Where can you spend the rest of your life? Is
where you are living now aging-appropriate? Can you afford and maintain your present
residence in five, ten, or twenty years? Is it manageable? Is it sustainable? Do you have the
support systems in place to make it work over the long haul?
This reminds me of a lady I met who lived in a huge old farmhouse at the end of a long dirt
road deep in the most rural part of Vermont, called the Northeast Kingdom. Her eyesight
was failing and soon she would not be able to drive. She also had mobility issues due to knee
problems. The home clearly suffered from neglect, as she hadn’t been able to keep up with it
for years.
“When you can’t drive, how will you get groceries?” I asked.
“My daughter can do that,” she replied.
“What about the house. How are you going to keep up with it?”
“My daughter can do that.”
“Have you talked about all this with your daughter?”
“My son can do that.”
Maybe not a sustainable situation.
16. One of the things I’ve learned in working with grown-ups over the years is that if you have
to move, the sooner you do it, the more successful it will be. Don’t wait until circumstances
force you out.
Moving early keeps you in control of your options. It also gives you more time to adjust and
be successful in your new place. Options reduce pressure, and any decision is more likely to
be better if you can remove the pressure.
Kelly and I live in a beautiful Victorian on the main street of a wonderful little mountain
village in the heart of the Green Mountains of Vermont. For over a quarter century, it has
been a struggle to afford the place, and yet I love it more than I can begin to express. Right
now we are managing, but I know the heating costs, property taxes, water rates, and upkeep
on so large a property will eventually drive us out of our beautiful home.
So, we are giving ourselves a three-year window to find a new place where we can retire in a
more aging-appropriate setting. After all, it is a huge house and the two of us really don’t
need to be schlepping up and down three floors when we are in our 80s. Better to depart
sooner and settle someplace while we are still young enough to make ourselves part of a new
neighborhood. That’s called right-sizing.
Make sure the Where works before you start financing a long-term plan to stay there. After
all, if you use your home equity up in a losing battle to remain in a place you can’t, you run
the risk of having less money available when you finally have to sell and move on to the next
phase of your life.
There was a client who met with her family and me. She had a lovely house, but most of it
was on the second floor and she had problems with arthritis. She was also struggling to
afford the expenses of a car. In the course of our meeting, I strongly encouraged her to
consider whether financing a longer stay in her current house was sustainable. If she sold
and moved into an assisted living facility, she might be able to maintain her independence
longer and stretch her money further than a reverse mortgage might do for her.
After a couple of weeks, I called back to check on how she and the family were doing with
the decision. She broke down in tears saying, “I’m not going to get the reverse mortgage.
You sided with my family and now I have to do what everyone wants. I already knew I had
to move, but I just wanted to delay it as long as I could. I hope you are satisfied.”
It isn’t my job to talk anyone out of his or her home. I do believe a reverse mortgage usually
gives the greatest value over the longest time. With some exceptions, if where you are isn’t
going to work, better to handle the problem today and start working on a future with a
longer horizon.
Sometimes, Where is a moving target, and that can be a bit more complicated. Often the
choice isn’t “move now or never,” but “how, where, or when is practical.” This can happen
when your plan is to move, but the house won’t sell, or after a lifetime of living has to be
boxed up, sold, or given out to the family, and you need to buy some time.
Here, it becomes a matter of weighing the costs of a Home Equity Conversion Mortgage
(HECM) reverse mortgage against the short-term benefits. Sometimes, in this situation,
people turn to a traditional equity line if they can qualify and handle the payments. A reverse
mortgage doesn’t have to be for a long time, it just has to be appropriate and the costs need
to provide adequate value.
17. When a spouse has recently passed and the survivor is struggling with too many changes and
choices, a short-term HECM can help. Here it is simply used to buy a little time so one
doesn’t have to make huge choices about selling and moving in the midst of grief.
18. When
Scott Funk
When is the best time to solve problems, even distant ones? Before they get bigger or closer.
This is especially true when it comes to retirement money issues. All other factors being
equal, if you are going to get a Home Equity Conversion Mortgage (HECM) reverse
mortgage, the sooner you set it up, the more benefit you may derive. Here’s the reasoning:
First is the basic concept of insurance. Insurance serves to transfer risk from you to
someone else. The sooner you transfer that risk, the safer you are and the lower the cost.
That’s why life insurance for a 60 year old is more expensive than for a 20 year old. There is
less risk and expense all around if you get the policy when you are 20.
Waiting to set up your HECM until later means you are carrying the risk of fluctuating home
values and interest rates. Program rules can change, and who’s to say HECM reverse
mortgages will even be available in the future? (Congress has to authorize the program each
year.) Then there is cost. Today we know the cost; tomorrow’s price is a mystery.
I spend an unfortunate amount of my time telling people a HECM will no longer work for
them. All too often, these are people for whom the option was viable when we first met, but
they delayed, the rules and home values changed, or they used up their equity with a
traditional equity line, and now that ship has sailed.
The second reason to act sooner rather than later is what I call the Cost of Living Adjuster.
Once you set up your HECM, the available credit line grows and compounds at the cost of
funds, independent of the property’s value. This benefit usually outpaces any advantage of
waiting until you are older.
Finally, there is peace of mind. Knowing in advance that things are set and how they will
work can save you a lot of emotional wear and tear. If it is the right thing to do, then getting
it done is usually the best next step.
19. Just like any insurance, those who need it least get the best deal. So, acting sooner can be
cheaper, may have less risk, and offers you the greatest benefit over the longest time. It is no
accident that When is the shortest section in this entire book.
However, it still needs to be the right choice in your situation. Just because it is a good idea
in general doesn’t automatically make it perfect for everyone.
Another When could be when you should start looking into a reverse mortgage, and that is
certainly before you need to get one. The earlier you consider it, the more control over your
choices you will have. There is also less pressure if you are just shopping around for ideas
instead of hurrying to solve a growing problem.
I got a call from a woman the other day. I met with her and her husband over a year ago.
Finances were tight at that time, but they were getting by. They had a traditional equity line
in case an emergency expense popped up. Although living on Social Security, they were good
at stretching dollars. Each time we spoke it would come back to the same thing, “Why do
anything when we don’t have a problem yet?”
The reason she called me is her husband had died the night before Thanksgiving and she
had just learned that her Social Security was going down and the last of the equity line had to
pay for his funeral. Now the monthly payments on the equity line were increasing beyond
her ability to pay.
Unfortunately, that put us in a race between getting the HECM closed and the house going
into foreclosure. In the midst of her grief and loss, during one of the most difficult times in
her life, she was forced to deal with the pressures and worries of money issues.
The final When is about when to involve family and trusted advisors as you explore reverse
mortgages. Here again, the sooner the better. If you wait until the decision has been made,
they really don’t have the opportunity to contribute to the process. It can become a simple
choice of “do it or not.” Better to encourage an engaged and thoughtful discussion, free of
the pressure of making a decision. It can be helpful to let them help you explore all possible
options, including selling the home, adjusting your spending practices, and looking out as far
as possible into the future as you examine your retirement financing options.
20. How
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How can you know your decision is the right one? That can be tough either way. Many of
my clients aren’t positive at the time they close their loan. Hopefully, if I’ve done my job
right, they understand why they are getting a Home Equity Conversion Mortgage (HECM)
reverse mortgage and are sure getting one will fit their situation. But most aren’t certain they
made the right decision until after they have gotten a few statements and have experienced
the release of worry and money pressures.
This is especially true for those who have waited too long to face their financial issues. They
often are acting under time pressures and don’t feel there really are choices. That is why I am
such a strong advocate of looking into a HECM before you feel like you need one.
I spoke with a lady recently who was six months into having her HECM when she told me,
“Scott, I had no idea how much stress I was under. Over the last few weeks it all came off
me like peeling an onion. I’m myself again.”
Stress doesn’t have to come from an immediate pressure. Each of us is different. Some
people worry about the present. Some worry about the future. Either way, it can turn into
stress.
A widower came to me because his financial planner felt he was living below his means.
When we met, it quickly became evident the gentleman was struggling not to use the money
available to him because he had reached the point of savings that represented the “nest egg.”
This was the money his wife and he had promised never to touch. It was the rainy day fund
and it wasn’t raining. Spending it would break trust with her.
When he understood the option of a reverse mortgage, he realized he could shift the nest
egg to the equity in his home and that enabled him to live according to his means.
His stress didn’t come from money; it came from the labels he put on the money.
21. What you can do is make sure no one is hurrying you. Don’t let family, advisors, or a reverse
mortgage salesperson pressure you in one direction or the other. Take your time. Get all
your questions answered, even those you don’t want to think about. If you make sure you
have taken all the right steps, that is about the best you can do.
How do you feel about debt and the interest accumulating on the money you have
borrowed? We are, after all, talking about borrowing money. You need to have permission
from yourself to use the equity in your house when you need it. Otherwise, you may take on
the costs without receiving the real benefits, the most important of which is the peace of
mind that comes with greater financial security.
How do your kids feel about the possibility that they may not be inheriting the property free
and clear? This one can be something of a paradox. I’ve rarely encountered adult children
who wanted the house as much as the parents want to pass it on. Most of the time,
everyone’s primary concern is Mom and Dad being able to maintain their own
independence. After all, if you can’t afford your expenses that can become a problem for the
very people you are worrying about giving the house to.
I had a call years ago from my dad, offering the family home to me. It was in San Diego, and
if you stood on the patio table you could see the ocean. All I had to do was go home and live
with Dad. Well, I was 3,000 miles away with a house and a life of my own. I didn’t want
Dad’s house, and I didn’t especially want to live with Dad.
It turned out, neither did my sisters. What we all wanted was for him to enjoy his life and
independence. Since we didn’t know about HECMs back then, we encouraged him to sell,
take the money, and stop worrying about us. He did, and all of us were the better for it.
However, it wasn’t that simple. After selling, it took Dad a year or two before he was able to
accept that the money was his and not ours. Even after all our talks and the selling of the
property, he hadn’t emotionally transferred that money from our account to his. Once he
did, Dad’s quality of life improved significantly. He started allowing himself little luxuries like
dance lessons and an evening out a few times a month. He had more fun, and we got our
dad back.
HECMs can cost more than other loans. You should feel you are getting your money’s
worth on the day you close. Even if the costs can be rolled into the loan, it is still your
money (your equity). Whether it costs $3,000 or $23,000, you should feel you’ve gotten good
value right away. What are you trying to accomplish? Is it worth the cost? Do the benefits
outweigh the consequences? Are you getting your money’s worth? Can you live with it?
22. Why
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Why you are considering a reverse mortgage is more important than what others think. It is
certainly more important than the numbers. Costs and benefits only become relevant in
relation to your purpose.
The more you understand the Why, the better chance you have of making the best decision.
Be sure to take a long view. What happens if you live longer than expected? Do you have
long-term care insurance? What’s plan B if your investments don’t perform as anticipated or
there is a financial emergency in the family? How will the finances look for a surviving
spouse or partner? Are there tax benefits or consequences you need to consider? How does
this fit with your legacy strategy and your heirs’ expectations?
Is your concern today or the future? Get the answers to these questions down on paper
where you can see them and others can review them with you. There is the math and then
there are your feelings about it. Why are you considering this step? What are the
consequences if things just go the way they have been going? Can you make changes in your
lifestyle and spending, and do you even need to?
Questions upon questions; it can get complicated. This kind of complicated is good. Simple
money decisions are often the most risky. Money isn’t simple and our times are nearly
incomprehensible. It should be no surprise that taking a different approach can be
uncomfortable. That is why taking the time to understand your motives and options is so
important.
Seek out advice from those you trust and respect. This is a wonderful opportunity to re-examine
everything about your retirement income strategy. Bringing in your adult children,
as well as professional advisors, to help you probe and explore your alternatives can be
helpful to you and instructive to them.
In retirement income planning, every decision is about the rest of your life. None of the
choices should be casual, and you have a right to expect the people you deal with to feel the
weight of what you are evaluating. It is more about the future than fears.
23. Be honest with yourself and those who care about you. Make it a group effort that comes up
with the whys, what ifs, and what the alternatives are.
You should also make your Home Equity Conversion Mortgage professional part of the
effort. While I am not a financial advisor, you would be surprised how often I meet with
clients’ families, financial advisor, accountant, or attorney. Whether it is on Skype or face-to-face,
everyone grills me for answers and uses me to explore options. Ideally, we are all part
of the same team working toward a single goal: your future financial security.
Knowing the Why is like having a compass heading. With that, it becomes easier to measure
everything else. You can tell what is taking you off course and when your heading is true.
24. Why Not
Sometimes, no matter what the reasons are for doing something, it just doesn’t fit with who
you are or what you will be comfortable living with. Home Equity Conversion Mortgage
(HECM) reverse mortgage credit lines have adjustable interest rates. That means they can go
up or down, with a cap of 10% above the start rate. It also means you can’t predict in
advance how much you will owe at any particular point in the future.
Rates fluctuate, plus how and when you will draw out money can’t be predicted either. That
means there are unknowns with a reverse mortgage that can’t be controlled. Can you sleep at
night knowing that?
When I meet with people to show them the figures, I highlight in green the money available
and show how it grows. I also highlight in red the money that is owed and show how it
grows. Then I say, “Green is good and makes you happy. Red is bad and can be upsetting. If
you are going to worry more about the red, then the green will never grow large enough.”
Often the people who can only see the debt side of the ledger come to the conclusion this
isn’t the right step. When they say, “Not for me,” I am always supportive of that choice.
Worrying about what interest rates will be on your loan in the future or about the mounting
debt against the house can make you miserable. You don’t need to pay to get a reverse
mortgage to be miserable. You can be miserable for free.
So, is a HECM reverse mortgage the right fit for you? Aside from the advantages and
reasons for considering one, will you be more comfortable than you are now? This decision
can touch core values about your home and life. How you feel about things is a critical piece
of whether the step will be successful or not.
This isn’t just about math and money. A reverse mortgage reaches into your home and
values that go back for generations. Be true to who you are and how you believe. Be real
about what you have to do and what is available for you, and about those you love and are
charged to care for.
25. Equity Security vs. Income Security
The Reverse Mortgage Dilemma
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It isn’t surprising that so many home owners, family members, and trusted advisors struggle
over whether a reverse mortgage should be considered. It touches heartfelt beliefs about
home ownership, legacy, and debt. The conflict is between equity security and income
security. Which takes priority? This can be a tough choice, and it should not be made lightly.
Even tougher is the decision to recommend or decide on one or the other during such
uncertain economic times.
Equity security rests on the time-honored tradition that owning one’s house debt-free is a
fundamental of financial independence. If your house is “worth $500,000,” then you are
“worth $500,000.” Your heirs know what they will inherit, and you are free of debt. It’s
pretty hard not to feel good about that.
The theory of equity security rests on the great assumptions of real estate: property always
goes up in value; you can always sell; and you can always get a mortgage. During the Great
Recession, we found out that the more you need money, the less the bank wants to lend it. It
also turned out that values can go both up and down. In a down real estate market, turnover
times are longer and prices are lower.
Today, we better understand that property values are just like any other area of finance; they
are subject to market conditions, which can fluctuate. Mortgage rules can impact sales and
our ability to refinance. This can affect property values, too.
Equity security is still equity security and that is that, regardless of market conditions or
financial experience. Otherwise, it wouldn’t be a core value.
Income security is more about a diversified and rebalanced portfolio. It sees the house as
one of many assets to be managed. It is about access to funds and the strategies of managing
all the wealth. After all, a house may be worth $500,000, but if no one is buying or the bank
isn’t lending, we can’t spend any of it. That is why houses aren’t considered a liquid asset. If
you can’t spend it, it isn’t worth much at the grocery store.
26. With much of retirement income planning there are tradeoffs, like how much I want to
spend now versus how much I want to be able to spend later. It shouldn’t be surprising that
there can be tradeoffs with equity, too.
So the conflict is between the house as a sanctuary and as an asset. A reverse mortgage is
simply a way to access the trapped wealth in the property. It converts a portion of the
home’s value into money we can spend. That is not the complicated part.
The complicated part is that a Home Equity Conversion Mortgage (HECM) reverse
mortgage also enables you to borrow money without the requirement of making monthly
payments. Instead, you borrow the money you get plus the interest and fees that accrue on
the outstanding debt, compounded monthly as long as a borrower lives in the house as their
primary residence.
This causes the debt to increase over time instead of going down like a regular mortgage.
The obvious risk here is you could borrow more than the house is worth, completely
eroding all your equity security. Then what happens?
The Federal Housing Administration (FHA) insures the loan against you or your heirs owing
more than your home’s value at the time of sale. So, you can’t be underwater. But you can
end up using all the equity and have nothing left when it is time to sell.
Of course, for that to happen you would have drawn down the available equity in spite of
the Cost of Living Adjuster having grown the credit line over time. Next, the loan would
have had to last long enough to consume the rest of the home’s worth in interest and fees
compounded monthly. (The HECM credit line starts at about 42% of the home’s worth up
to a $625,250 value.)
That this is a complicated choice should not be surprising. We are talking about balancing
conflicting priorities and values. It is a particularly difficult choice for financial advisors who
are charged with the responsibility of helping clients protect their wealth as well as manage
finances with an eye to longevity and sustainability of assets under management. Many don’t
even manage home equity, so it is completely off their radar.
Unfortunately, we can’t count the same money twice. Whatever our goals and plans during
our working years, we are now dealing with financial facts few anticipated. We don’t always
get to pick the era in which we retire. But we do get to decide how best to manage all our
resources to make the most of our wealth for the longest time possible.
28. Afterword
My goal here has been to separate the way to consider a reverse mortgage from the numbers
and process of getting one. By starting with a clear appreciation of why you are looking into
a Home Equity Conversion Mortgage (HECM) reverse mortgage, you should have the best
opportunity to evaluate the costs, benefits, and downsides of getting one.
Dealing with retirees is a sacred trust, and one of the most heart-wrenching parts of my job
is working with people who make their decision based solely on math or the advice of well-meaning
people who offer discouragement but no alternatives.
That’s why I wrote this. It is about you, your home, and the rest of your life. I pray this has
assisted you in evaluating whether a reverse mortgage should even be considered. If you do
consider one, I hope you now have a framework greater than the numbers in which to
evaluate it.
In a very long working life, I have never had a job I took more pride in or that gave me
more satisfaction. I am very proud of what I do for a living. It is my privilege to make the
world better, one retiree at a time. Yeah, I do it for the money. So, make me or whomever
you decide to work with earn it. This ain’t hard work. No one gets callused or bruised in
banking.
You are also encouraged to visit http://ReverseMortgageQuestionsandConcepts.com
(www.ScottFunk.org, for short). I’ve created this website to be a safe place where you can
get answers to your reverse mortgage questions without pressure to make a choice. There is
no calculator on the site, and you don’t have to give out any information to learn what you
want.
This is a tough time to be planning for the future, but it offers more promise for success
than trying to straighten out the past.
Parting Thought: “We can’t solve our problems with the same thinking we used when we
created them.” —Albert Einstein.
29. About the Author
Scott Funk
J scott Funk has over twenty years of experience in the mortgage business. For over a
decade, he has specialized in reverse mortgages, Home Equity Conversion
Mortgages (HECMs) specifically.
Scott has consistently been among the top producers in the country for the industry’s
leading lenders.
In his HECM career, two things have separated him from the herd. First, he has
consistently seen HECMs as a way to manage abundance rather than scarcity.
Second, his team keeps in contact with clients who have closed their loans.
This is not done just to solicit referrals. After all, if you have to ask for a
recommendation, you probably don’t deserve one. Instead, the purpose of the
continued contact is to learn how HECMs really work in borrowers’ lives. By staying
connected with closed clients, Scott and his team are also able to help smooth over
communication glitches that may occur in the servicing of the loans.
Along the way, Scott has become an outspoken aging advocate. His monthly
column, Aging in Place, is printed in over twenty-four newspapers across Vermont
every month. He also blogs regularly at
http://ReverseMortgageQuestionsandConcepts.com (or www.ScottFunk.org).
With a background in public speaking that goes all the way back to a presentation in
San Quentin Prison (he was a visitor, not a guest of the state) in the ‘60s, he has
addressed a great variety of subjects to a diverse range of audiences. He was part of
AARP’s Speaker’s Bureau in Vermont. Scott currently offers a talk on the Myths of
Aging (lies is such a loaded word).
Aside from making a buck as a reverse mortgage consultant, Scott is on something
of a crusade to change how we use and understand Home Equity Conversion
Mortgages. His website is unique in the reverse mortgage business in that it is
designed to give away information instead of gathering information to chase leads.
30. Scott is currently working on another e-book, The A B C’s of Reverse Mortgages.
His writings are part of a continued commitment to the retirees he serves. “People
want answers to their questions. That makes the most important task education.”
