Many needy boomers facing the golden years are taking the advice of the Fonz and former U.S. Senator Fred Thompson through various tube testimonials.
They’re opting for reverse mortgages (RMs) in increasing numbers. Indeed, Inside Mortgage Finance, a trade publication covering the housing industry, recently reported that borrowers took out some $15.3 billion of these loans last year. That was an increase of 20 percent over 2012. Reverse mortgages, which are available to homeowners age 62 and up who have a debt-free home, are becoming a popular way for boomers without significant assets to fund retirement.
However, most financial advisers I speak to are skeptical about the Fonz’s sales pitch—-“Take control of your life. Today,” he announces at the end of his television pitch—while others say they have clients who use reverse mortgages but with numerous caveats. “I would only consider the reverse mortgage as a last resort. They cost a lot and there are better ways to pay for retirement,” according to Charles Hughes, a Bayshore, New York certified financial planner. [i]
I use the term certified financial planner throughout this article for a reason. It is because it very different from someone calling himself an adviser or a planner and collecting fees. Anyone can do the latter. However, a certified financial planner, CFP) took a series of courses to demonstrate knowledge in various financial subjects to earn those marks. The CFP also must continue to prove his or her knowledge. The difference between a planner and a certified financial planner is the difference between someone who has some accounting knowledge calling himself or herself an accountant and someone who has passed a series of tests and earned the CPA designation, a certified public accountant.
“Gone are the days of gleefully burning the mortgage and passing on the home onto the children,” he adds in a client publication. Hughes, who has been one of the leaders of the financial planning industry since its birth about 35 years ago, says his hesitancy to use the reverse mortgage is shared by most of his colleagues in the advisory business.
There are several types of reverse mortgages: Single purpose—which is offered by local governments and non-profit organizations—-federally insured reverse mortgages and proprietary reverse mortgages and private loans. The latter are backed by the companies that write them. The single purpose reverse mortgage is generally the least expensive, according to the Federal Trade Commission. And that is a factor in how advisers view them. Costs are one reason why advisers generally say homeowners should try to avoid these loans.
“The fees are just too much. They’re just too expensive,” according to Raymond Mignone, a certified financial planner in Little Neck, New York. Loan origination fees, mortgage insurance and home appraisal costs are among the charges the reverse mortgage client will pay. “I always try to help clients, who need more income, to find it another way,” Mignone added. A third adviser notes that taking equity out of a house goes against most retirement planning assumptions.
“Generally, you should have debts paid off in retirement,” adds Ronald Roge, a certified financial planner in Bohemia, New York. He says that the reverse mortgage often comes with high fees.
Still, one planner says for some people without significant retirement fund assets reverse mortgages are critical.
“They can be a valuable tool for those who need cash and have no other option,” says Anthony Ogorek, a certified financial planner in Williamsville, New York. Nevertheless, Ogorek also wants clients to explore every option before using these pricey loans. And sometimes there are other ways to fund retirement.
For instance, Mignone adds, an effective method of financing retirement could be to move out of a house—it could be an expensive old one that is likely to need many repairs—-and into a less costly place such as an apartment. Adds Hughes, a realistic lifestyle change, possibly moving to a cheaper state, could also help a person afford retirement and avoid a reverse mortgage.
Mignone, who notes retirement planning is a big part of his advisory practice, said he has yet to have one client actually use a reverse mortgage. In part, it is because he has dissuaded them, Mignone says. Hughes says he had one client use the loan but it didn’t work out well. Still, Mignone acknowledges the popularity of the product, although that’s a black mark with him.
“Whenever you have companies and brokers doing well, often it is the client who ends up paying the bill,” he says. Another potential problem is one of the selling points of a reverse mortgage: The mortgage company, as part of the deal, says it will never foreclose on your home in your lifetime. But that comes with a few hedges: It’s provided you have not lived in another home over a year. And Mignone notes that might not be a problem at the outset of a retirement. But, as a person lives a long life, maybe longer than he or she could have guessed, it could become an issue.
“What happens,” Mignone asks, “when an elderly person is physically incapable of staying in a nursing home? You have to go to the nursing home, but you probably won’t have the money to do it”
For Mignone, and many others in his profession, the need to use a reverse mortgage is “a confession that someone didn’t adequately prepare for retirement.”
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