Reverse Mortgages

home mortgageI follow an internet magazine that can be described politically as progressive. Early last month a summary of articles appeared in my email inbox that included one entitled Reverse Mortgages: The Final Blow Killing Middle Class Wealth by Egberto Willies. The date it first appeared was August 18, 2013.

The author claims that reverse mortgages are yet another ripoff, promoted by greedy bankers intent on removing money from our pockets. While I understand and share the basic sentiment about ripoffs, it’s clear the author didn’t and may not yet have a clue what he’s talking about. He says that reverse mortgages are “nothing but a no-risk gift to the bankers, a wealth transfer engine from the masses to a select few.”

He goes on to make more than a few factual mistakes, with little or no understanding of the positive role a reverse mortgage can make in someone’s life. Take me, for example.

I am a financial planner, first earning professional credentials in 1981, have owned my own Registered Investment Advisory firm, and have embraced a fiduciary standard from day one. While far from wealthy, I’ve enjoyed a solid professional career and been part of the social and professional fabric of my community for over 50 years. I can be described today as partially retired, though still very engaged with clients and prospective clients.

The 2008-09 crash made like difficult for many people, for many reasons. I had planned to retire and play golf. All the necessary pieces were properly lined up and ready to go. With the crash, however, many of the critical pieces of the puzzle came unglued. Part of me thinks, as a financial planner, I should have known better, but the another part realizes there were forces at work that were simply bad timing. Our story is not dissimilar from millions of other people across the country.

In my judgement, the writer of the DailyKos article makes assumptions that are far removed from reality. He suggests that banks are ripping off those wanting to leave assets for their children. In my case, I have a substantial life insurance policy in place to provide financial security for those I leave behind. There are many who will argue that life insurance is a ripoff, and it can be, but not in the hands of a professional adviser. The same has to be said about a reverse mortgage. If you are willing to be duped, then it’s very possible you will be. This observation is valid about dozens of other financial products.

My reasons for using a reverse mortgage arise from our downsizing to a home that is more realistic in terms of what we can look after and what we need to feel comfortable. Without a mortgage payment, it allows us the ability to continue our lives with a degree of financial freedom and peace of mind that we cherish.

To get here, we initiated what is known as a Reverse Purchase. We purchased a new house, paid for in full with our money and a reverse mortgage. This amount came from a lender willing to advance roughly 50% with the debt accruing behind the scenes. The property title is in our names, and the note is known as a non-recourse note. This means that if the debt somehow exceeds the value of the home and land at our respective deaths, our heirs will not be responsible. To achieve this, an amount is added to the accruing total that pays for mortgage insurance.

A downside to a reverse mortgage is upfront cost. For anyone who has purchased a home with traditional mortgage financing, you are very aware of how much it costs to initiate and record the debt. The same thing happens with a reverse mortgage, and just as with a traditional mortgage, the cost can be added to the obligation. In our case, the total will grow in the background and when the lights finally go out and the debt paid, what’s left will pass to our children. Meanwhile, we get to live our lives as best we can without having to make monthly payments to one of those pesky banks.

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