A Disagreement Between Old Friends About Reverse Mortgages
Have you ever overheard someone trying to win an argument with completely wrong facts?
This happened to me recently while having dinner with the family at The Old Spaghetti Factory. We were celebrating Nana’s 86th with nine grown grandchildren and their spouses and six great grandchildren in attendance. There were also a few family friends which brought the total group size to twenty-six.
Are You Really Thinking About Getting a Reverse Mortgage?
We had just placed our dinner orders when my aunt Debbie’s friend Karen turned toward her and blurted out, “You aren’t still thinking about getting that Reverse Mortgage are you Debbie?”
Aunt Debbie’s response, “Well yes I am exploring my options.”
My thought, “That is a good response.”
The Government is Trying to Steal Your House! (Not True)
Karen (annoyed), “Why in the heck would you do that? You know the government is just trying to steal your home!”
My next thought, “Uh oh!!!! Here we go….”
What Karen doesn’t know is she is sitting right next to someone who happens to know A LOT about Reverse Mortgages. What I didn’t know was that my aunt Debbie had been considering a Reverse Mortgage for quite some time. She had seen the late night commercials on TV, and she was researching and reading articles online about the pros and cons of tapping into her home equity. Unexpectedly I was sidelining an argument and I had to work very hard at biting my tongue as I watched my Aunt Debbie and Karen get into a furious debate.
Aunt Debbie: “No, the government is not trying to steal my home, it’s just government insured. The government never has title to the home. You only have to get the FHA insurance on these loans in case your house goes underwater. The government covers the losses.”
The Banks Steal Your Money & Your Home (Not True)
Karen: “Well the fees are ridiculous!”
Aunt Debbie: “They can be, but some of the fees are negotiable, my broker gave me a credit for a lot of the fees. Hopefully I live at least another 20 years so if you spread the fees out over that long without having to make a mortgage payment it’s worth it! I am also going to have a $50,000 line of credit that grows larger every year if I don’t use it, and I don’t plan on using it unless I NEED it.”
Karen: “You know that Reverse Mortgage is going to suck all the equity out of your home over time!”
Debbie: “Well back in 2008 my house was underwater and I almost had a short sale! Now that the market has recovered if I get the Reverse Mortgage and the market tanks again, I’ll be protected by the FHA insurance.”
The Heirs Are Burdened with the Debt (Not True)
Karen: “Yeah well then you’re not going to have anything to leave to your kids! The lender gets your home when you die!”
Debbie then frustratingly turned to me and asked: “Tricia you know about Reverse Mortgages right? Does the lender get my home when I die?”
At this point I felt like a race horse just waiting to get out of the gate…..
“That is INCORRECT Debbie. In fact, when you pass your home goes to your heirs. Any equity left in the home is entitled to go to your estate.”
Karen: “Yeah and if you are underwater then your estate and your kids have to pay off the lender!”
Me: “That is also incorrect. As Debbie stated, the FHA insurance will cover that scenario. That’s why it is required. If the Reverse Mortgage balance is more than the market value of the home, her heirs are not on the hook for the balance. At that point they have the option to pay 95% of the appraised value, or let the home revert to the lender, but if there is remaining equity that difference goes to her estate or whoever she wills the home to.”
You Are a Sucker (Definitely Not True)
Karen: “Yea well by that point she’s not going to have anything to leave to her kids! It’s a stupid idea. Anyone who would do it is a sucker.”
This is when Aunt Debbie got very angry and gave her best response yet: “Right now I am working to pay this dang mortgage payment and at this rate I am going to have to work another 5 years and delay my Social Security longer just to make ends meet.”
“I have worked hard to own my home. Why shouldn’t I use my equity.”
“I don’t want to work another 5 years!”
“I want to retire! I want to enjoy life! I want to travel while I can!”
“Do my kids pay my bills and my mortgage? NO!!! Are they GOING to pay my bills and my mortgage? NO!!!”
“Do I care about leaving my house to my kids, well yes but I am not going to struggle to pay this mortgage for the rest of my life and work longer to do it!”
“I’ve done my research and I have evaluated the pros and cons and I am getting this reverse mortgage! I have talked to my kids and they understand, they have said I should take care of my needs first, not theirs, they are doing fine! It’s my house I paid for it, it’s my equity I should be able to use it!”
Karen didn’t have much more to say. I think she felt kind of embarrassed.
What Did Aunt Debbie Decide?
I checked in with Aunt Debbie to see how if she had made a final decision on a Reverse Mortgage. She excitedly said “Yes, in December I closed my Reverse Mortgage and it has been a blessing” (6 months ago).
Since taking out her Reverse Mortgage Aunt Debbie:
- Has decided to continue working only until the end of 2015.
- In six months she will be officially RETIRED! Not in 2020 like she had originally anticipated. She is starting her retirement a full four years early!
- No longer has a monthly mortgage payment.
- She also no longer has a mortgage interest deduction on her tax return, so
- She is maxing out her annual 401K Contribution as a tax write off
- Since she is over 50 she can take advantage of the annual catch-up contribution with her extra cash.
- Has paid off all of her high interest credit card debt, and
- Is increasing her charitable contributions
- This is an added tax deduction, and helping others in need also makes her feel great.
Another positive outcome of the Reverse Mortgage is that has given her extra room in her budget to take her eldest grandson on a cruise to Alaska next week! She is very excited as she has never been on a cruise. She fully plans on creating special memories with each of her 4 grandsons by taking them on their own adventure with their Nana.
Aunt Debbie’s Advice to Others Considering a Reverse Mortgage:
I asked her for final advice to people who are considering a Reverse Mortgage:
“This product is not for everyone. My friend was obviously against the Reverse Mortgage because she misunderstood it. Even my father’s first reaction was against it. I did my own careful research, and explained it to both of them, and they both agreed that it made sense once they understood my situation and how it would help me.”
“Before the Reverse Mortgage I had a lot of work and financial stress. So much stress that it negatively affected my health. Stress can make you sick and can cause heart attacks, and strokes. I know because it did that to me! (Aunt Debbie suffered a stroke less than two years ago because of her stress levels, thankfully she is recovering well). Now I feel a sense of relief, the stress is gone. It’s important to get stress out of your life.”
“The only stress I have right now is to decide if I should take my summer clothes on this cruise? Is it going to be cold? I don’t know, it is Alaska!”
My Honest Opinion of Reverse Mortgages
Are Reverse Mortgages right for everyone? I say no. Do I talk to people every day that are struggling and could have a much better life if they had a Reverse Mortgage? Undeniably yes.
When people ask me if I recommend a Reverse Mortgage this is my answer. First evaluate the pros and cons. Your pros and cons, not someone else’s. Second, decide what is more important, enjoying your golden years comfortably and feeling more secure, or living month to month with little wiggle room while continuing to pay on your children’s inheritance.
If you find that you would like to have some extra comfort in your budget by eliminating your monthly mortgage payments or securing an emergency line of credit, by all means, explore that option. You can still preserve some of your home equity with this product, just be responsible, and do your homework. Shop around and work with someone reputable. Talk to your family, listen to the naysayers, but make your own decision. That’s how you take charge of your own future in retirement.