Let me address these three common objections.
Regarding increasing debt: The reverse mortgage loan is a loan that needs to be paid back when you die or when you leave the home. All loans are considered debt. So if we isolate the word “loan,” I have to agree with the naysayers. But consider what the reverse loan is secured against. The loan is secured against the home’s equity. The equity is yours. It is what a large portion of your payments have gone toward for many years. The fact is, when you’re borrowing from the equity, you’re borrowing from yourself. The term “reverse” refers to a reverse position with the bank. In a conventional loan, you pay the bank. In a reverse loan, the bank is now paying you back your equity, the same payments you have made to them in the past. It is a very difficult concept, but the bottom line is, the debt the naysayers are referring to is paid back by your decreased equity when you leave the home or when you die. You never have to actually write a check to pay the loan back; you just get less of your equity back— which is what depletion of equity is. Naysayers call it debt; I call it a depletion of equity.
The second thing naysayers don’t like about a reverse mortgage is, according to them, it is too expensive. Yes, there are lenders who charge high fees, but on the other hand, there are lenders who will credit you all the costs and fees, making it a no-cost no-fee loan to you. This is why you need to shop for the best deal. All lenders charge different costs and fees, and you need to find an experienced loan officer who you can trust.
These naysayers will also tell you that the mortgage insurance cost of the loan is too much. But in the same breath, they recommend other types of insurance, such as health insurance, life insurance, or auto insurance. It is true there is a monthly fee coming out of your equity called mortgage insurance. But like all insurance products, there is a benefit to the insurance. In a reverse mortgage, the insurance guarantees that the borrower can live in the home for as long as they want and guarantees that the borrower or the borrower’s family will never owe more than the value of the home. Naysayers call this an unworthy expense. I call it security.
It appears that naysayers do not appreciate the fact that with a reverse mortgage you have a place to live for as long as you desire. Or perhaps they don’t value the improved quality of life that a reverse mortgage can offer because of the extra spendable income and the convenience of not having a mortgage payment to make.
In reality, the naysayers themselves would benefit from a change of attitude—a shift in perspective that would could allow them to view home equity as an asset owned by the homeowner and appreciate the value of converting that asset into spendable cash.
Lastly, the notion that a reverse mortgage means your heirs might not get the house is very misleading. Regardless of the type of mortgage loan on your home, your loan balance needs to be paid off by your heirs when you die. If your heirs want the home, they need to pay off any existing loans with cash or by putting a new loan on the property. So to rebut the naysayers your heirs can keep the property if they want to; they just need to pay off any loan balance. But as we discussed in the previous chapter, most of the time your heirs will sell the home and divide the remaining equity per your instructions in your living trust or will.
Problem with Naysayers
The thing that frustrates me the most about reverse mortgage naysayers is that their critical attacks result in very challenging consequences—spend less, make do without, ask the government for help, get a roommate, move in with family, or sell your home and move to a less expensive area away from family and friends.
Naysayers, are any of these options a desirable solution? In my view, they are nothing close to the American Retirement Dream. I want to see Baby Boomers living close to family, hosting family gatherings in the family home, spoiling their grandchildren, and growing old with life-long friends. I believe that during retirement, you should be able to maintain the same life style that you had when you were working. I want you to continue to go out to dinner, going on vacations, and giving of your time to your church and charitable causes. Working more and spending less is not a reasonable solution to the retirement problem.
I believe securing your home for as long as you want to live in it and increasing your spendable income by converting your own equity is a good solution for many.