Is a Reverse Mortgage the Answer to HarMoney?

One of my dearest friends in the entire world has been in total agony over the outcome of her father’s estate. It is at her request that I’m writing this blog.

Unbeknownst to her sister and herself, her father got a reverse mortgage. Now, I don’t know all the details, but what I do know is that my friend was never salivating or scheming to get her father’s home …but it was the family home-the one she grew up in, an estate really, on a ranch that was worth quite a bit of money. She had always adored her father and he adored her. She was daddy’s little girl. (I remember seeing the pictures of them both together, embracing each other, she in her worn-out, cowgirl boots, and Daddy beaming.)

She had been led to believe that she would eventually inherit his estate, along with her sister. In the back of her mind, her plan had been to care for her mother (long divorced from dad) and possibly even buying her own home, her first home, if there was enough left over after mom’s care.

At the time of his eventual death, the mortgage company demanded the sale of the home, took it before they knew what was happening, and in the blink of an eye, what they thought they were inheriting was gone …just like that. They never saw it coming …or quite literally, going.

Apparently, the way her dad’s reverse mortgage was written was to benefit the mortgage company. I’m sure he didn’t realize that. He probably never wanted to “bother” his kids with his lack of cash flow and believed that the estate would be intact after his “loan” was paid off. But sadly, it was anything but a good thing for them.

I work in a community full of retired educators whose retirements were based on annuities that last for a specific period of time and not for life. Many retirees have found they’re outliving their retirement income. Many were literally cash poor and house rich (I reside in California where housing values are generally higher). Many of these retired folks were a “young” 70+ age and couldn’t see calling their kids to ask for financial help as they felt completely capable of maintaining their independence, nor did they want to leave their homes of 20, 30 or even 50 years. For them, a reverse mortgage made sense, but only if the numbers worked out.

For others, it was a much better deal to sell the beloved home and downsize into something they could more afford. But the heartache of moving, getting rid of life-long belongings due to a lack of space, or losing their identity as in my girlfriend’s case (daddy was a rancher), nearly broke them.

Working with a seasoned, ethical, reverse-mortgage expert is the key to discovering if this is a good move for you and your family.
There is a pre-counseling appointment, performed by an individual who is not involved with the mortgage company and is unbiased. They help educate the potential clients of benefits and pitfalls. Be prepared with any and ALL your questions. (No question is stupid when discussing the outcome of one of your largest, if not THE largest asset you own.)

As an advisor, I’ve made it my business to KNOW ethical, reverse-mortgage specialists. These folks do ethical presentations and disclose the pros and cons to the potential clients. How do I know this? Because I’m there at the presentation with them-I don’t leave my clients alone. I also advise my clients to tell their children what they’re doing and why, often with myself as the mediator, especially when the children cannot possibly attend the presentation due to geographic constraints.

The benefits of a reverse are quite simple, cash flow is accessible where before there was none. Reverse mortgage “takers” remain independent and not dependent on their children. It’s freedom for both generations.

However, the pitfalls are numerous. They are costly. They are confusing. They do put a lien on the home. And depending on when the reverse was entered into, they could deny the beneficiaries an inheritance.

Mortgage companies are entities, not people. They are like a machine. Once the trigger is pulled that allows the mortgage company to reclaim its monies, in this case, the death of the home owner, it is going to do that. (Another trigger is when the home owner moves out of the home and into a facility for an extended period of time-check the paperwork to see what that time limit is before you sign anything!) And in this climate, mortgage companies aren’t exactly friendly. They can foreclose very quickly if the beneficiaries of the home aren’t prepared and ready to do what is necessary to keep the home by buying it back, often at a discounted rate.

If I have any advice, it would be:

  1. MOST IMPORTANTLY… Let your kids know what you’re intending and why. It can be scary finding out your kids are planning on getting the family home. But knowing that information and then making a decision with them in-the-know is always a better option.
  2. Have EVERYONE attend the pre-counseling meeting so questions are asked from all points of view.
  3. Read everything, and I mean EVERYTHING!
  4. Run the numbers so you have the best idea possible of what this is actually costing you over the projected length of time. Not all reverse mortgages cost the same.
  5. Talk to more than one or two reverse mortgage specialists. Verify their credentials, how long they’re been working with reverse mortgages, and if there are any complaints against them with the regulating agency providing their license to sell.
  6. Explore other options, like down-sizing, assisted-living communities, and whatever else is available at the time.
  7. Don’t be afraid to seek out help from your own trusted advisors.
  8. If you choose to move ahead, take the monthly income option as opposed to a lump sum! The lump sum costs more and can actually run out rather quickly if someone isn’t very good at managing a pot of money.
  9. And lastly, if it doesn’t feel right, follow your gut. Don’t allow yourself to be talked into something you don’t understand or want.

I have a saying, “Every product has a purpose, find the product to fit YOUR purpose.” Don’t get scammed or leave your family in shock and/or pain. If your family is contentious, hire a third-party to act as a mediator. It will be so worth it when everyone is on the same page.