Reverse Mortgages: Part of a Process, Not a Product

Reverse mortgage professionals frequently run into the perception that the products themselves are simply “bad” — either based on a potential borrower’s experience with the loans in real life, or through decades of media coverage. But one financial planner says it’s best to abandon the idea of the Home Equity Conversion Mortgage as a “good” or “bad” product at all, and reshape the question as a matter of process.

“Far too often, people spend all their time thinking about products and outcomes,” financial planner Stephen Kelley wrote in the Lowell (Mass.) Sun on Monday. “I believe this is a sure road to failure.”

Kelley, of Safety First Financial Planners in Nashua, N.H., writes that too often, clients lose sight of the larger retirement-planning picture when focusing on a particular product’s public reputation — particularly with reverse mortgages and annuities, both known as products that financial planners frequently recommend but which have suffered negative reputations.

He gives the example of a 64-year-old man who makes $16 an hour in a “manual job,” and will eventually need about $2,000 per month in retirement.

The man owns a $225,000 house with $80,000 in remaining mortgage payments, along with some rental income. To get him to his $2,000 per month goal, Kelley recommended delaying retirement until age 70 to ensure a larger Social Security payment, as well as taking out a reverse mortgage to tap into his existing home equity. And that’s where the trouble began.

“He mentioned a friend had urged him to start receiving Social Security right away, or else he could ‘lose’ his benefits. “His friend was also quick to point out how ‘bad’ reverse mortgages are, and how he should avoid them at all costs,” Kelley writes, adding that the client also worried about not having any money remaining after the reverse mortgage loan was repaid.

Kelley challenges these misconceptions by putting a wider lens on the man’s retirement picture. Why look at Social Security as an immediate-winner-take-all cash grab when the entire point is provide a steady income throughout retirement? And why worry about eventually repaying a reverse mortgage if it makes sense for this particular man’s senior years?

“My response: So what?” Kelly writes of the reverse mortgage concern. “He has no kids and never married. He wants to live in the house until he can’t anymore. And while he’s living, his number-one issue is cash flow. These needs are supported by the reverse mortgage — in fact, all of these are exactly what they were designed for.”

Kelley closes by challenging readers to question conventional retirement wisdom and focus more on their individual retirement goals.

“Ask yourself what outcome you are looking for. If the products being suggested support that outcome, and that outcome is really what you want, go for it,” Kelley writes. “After learning everything you can about it, of course.”

Read Kelley’s full piece at the Lowell Sun.

Written by Alex Spanko