Besides the myths, misconceptions, and media misrepresentations of reverse mortgages, one of the most common criticisms of the loan is that they’re too expensive.
To be fair, the federally insured Home Equity Conversion Mortgage (HECM) certainly has substantial upfront costs, most significantly the Upfront FHA Mortgage Insurance Premium (UMIP). The maximum upfront FHA premium for an HECM could be as high as $22,996.50 for a home appraised at $1,149,825 (the current HECM limit) or higher.
The real question is “HECMs are expensive compared to what?”
A recent article from the online Canadian media outlet The Globe and Mail entitled Retirees in debt have found an expensive way to get relief grabbed my attention. This article is accurate and fair, but it does bring to mind the need for a discussion of the upfront and ongoing costs of reverse mortgages compared to the unique benefits the loan can provide. The real question is that HECMs are expensive compared to what?
To answer this question let’s examine the costs or consequences of being cash flow constrained in retirement. Below are just a few examples.
| The Consequences of lacking cash flow in retirement | |
|---|---|
| Avoiding medical appointments or foregoing medications risking a more serious disease or condition. | The emotional toll of financial distress can lead to depression, hopelessness, or in some cases even suicide. |
| The inability to keep up with inflation where Social Security or other retirement accounts fall short. | Becoming a financial burden on adult children who step in to help an aging parent meet their living expenses. |
| Shortening the lifespan of retirement account balances by taking larger systematic withdrawals to meet expenses. | Falling behind on property taxes (with an existing traditional mortgage) and risking foreclosure. |
| Being unable to pay homeowners’ insurance premiums and risking potential foreclosure from the lender. | Having to work far beyond your intended retirement age. |
| Being unable to afford to travel to see children, grandchildren, or close friends. | The lack of funds to make needed repairs and maintain the home reduces the property’s value. |
| Having to drive an unreliable vehicle. | Being unable to purchase healthful food instead buying more affordable but less nutritious food items. |
| Being saddled with an ongoing mortgage payment only to pass the home onto children who may squander the money they inherit. | A generally lower quality of life. |
Certainly, reverse mortgages are not a panacea for every older homeowner, but their upfront and ongoing costs are buying something intangible- peace of mind. The calculus of one’s desired quality of life in retirement compared to the costs inherent in a reverse mortgage should be the centerpiece of the decision-making process.
For some, the question is (as one reverse mortgage professional aptly said) ‘What’s your Plan B?’
by Shannon Hicks