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5 Common Concerns about Reverse Mortgages and How to Address Them

By Kathy Nitz
GolderCare Solutions

Reverse mortgages have been a Godsend for some people over the 60 years of their existence.  They haven’t always worked out so well for others.  Over the years, they have perhaps come in for more than their fair share of criticism and concern. Let’s look at 5 of the more common criticisms and concerns and explore how they are best addressed.

First, Reverse Mortgages don’t help the neediest of the needy.

It’s true. They’re not a universal solution. Their utility is limited. They can’t help the neediest of the needy. Think about it: the neediest people can’t afford to own their own home in the first place. Reverse Mortgages require a home to place the mortgage against. By their very nature, therefore, Reverse Mortgages cannot be utilized as a financial solution to help the neediest of the needy. There are public housing programs to address that.

So, they’re not the next best thing since sliced bread. But nobody said they were. This is ultimately an unfair criticism.  Despite this limitation on their utility, they are regularly used as a great tool to help many people age in place at home who couldn’t otherwise be able to afford it.  Bottom line: their primary benefit to society is to help keep people at home who might otherwise be forced into higher and more costly levels of long-term care.

Second, Reverse Mortgages often come at the expense of a reduced legacy after we’re gone.

That’s one way of looking at it. To the extent we extract equity from our home during our lifetime, there will be that much less left for the next generations of family members.

But this is ultimately an unfair criticism, as well.  It’s based upon an unfair standard. While it may be a secondary goal to leave one’s house as part of one’s legacy to the next generations of family members, keep in mind that a more primary goal of aging retirees is usually not to become a burden to those family members during one’s lifetime. Keep in mind: eliminating a ‘negative’ legacy can be viewed as another form of ‘positive’ legacy. Even if you don’t have anything left to leave them, at least family members won’t be forced to spend down their own assets on you. That’s a good thing.

It’s Mom and Dad’s primary job to meet their own needs to the extent they can.  Leaving a legacy behind after they’re gone is strictly secondary. We always tell our clients that it’s Mom and Dad’s money and that, if there’s a dime left when Mom and Dad are gone, it’s a dime more than you’re legally entitled to expect. Bottom line:  we’ve got to meet Mom and Dad’s needs first.

While we’re on that subject, meeting Mom and Dad’s needs may include more than just covering their basic necessities or meeting their Standard of Living. It often includes increasing their Quality of Life, as well. Sometimes, optimizing Mom and Dad’s Quality of Life involves increasing their quality time with family members while Mom and Dad are still alive and vital. This can increase both Mom and Dad’s Quality of Life as well as that of other family members. Think of it as allowing family members to pre-access and pre-enjoy their legacy from Mom and Dad before they pass away and are no longer here to enjoy it with remaining family members.

As a final point on the reduced legacy concern, you should be aware that some circumstances may allow the economic purchase of life insurance to replace the value of the home equity lost to the Reverse Mortgage.  However, that’s a topic for another day.

Third, the cost.  How much is too much?

Reverse Mortgages come with a cost.  Well, all mortgages do.  But because Reverse Mortgages are government-insured loans, there is the additional cost of the premium for that government insurance. There is also and additional cost for government-mandated education to better understand Reverse Mortgages. The majority of any additional cost, however, stems from the insurance premium paid up front.

How much additional upfront cost is too much?  That’s for each individual borrower to decide.  Standard wisdom is that if a Reverse Mortgage allows you to get another 5 years or more of living in your home, then it was worth it.  Some people, however, are happy to pay the upfront premium cost for just an added year or two of staying at home if it provided them the Quality of Life that no alternative solution could have provided.  As said, the decision is yours.

Once again, it helps to keep things in perspective.  It’s not right to look only at the cost of the upfront insurance premium.  We have to look at the benefits the government insurance provides as well.  One of those benefits is that neither you nor your family members will be held liable for any unpaid mortgage overages when the house is finally sold and the loan settled.  After weighing the value of the benefits against the cost of the premium, it can be said that while Reverse Mortgages are costly, they aren’t necessarily expensive.  You’re paying more in order to receive more value.

Fourth, permissive lending standards traditionally associated with Reverse Mortgages have historically been problematic.

It’s true.  Reverse Mortgages deservedly got a bad rap for being given to people who couldn’t afford them.

In order to qualify for a Reverse Mortgage, the owner has to be economically fit to pay the annual real estate taxes and the house insurance premiums.  If not, the government insurance program will sustain unintended and unfunded losses.  Permissive lending standards enabled too many of these nightmares.  It got so bad at one point that Wells Fargo got out of the Reverse Mortgage market rather than continue to face an untenable dilemma:  pay the taxes and insurance Granny should be paying or foreclose on her and face an avalanche of bad PR.

Today, the old permissive lending standards have been tightened up.  You’ve got to be demonstrably able to pay your ongoing real estate taxes and house insurance, and you can’t have fallen behind on paying your bills.  As a result, the Reverse Mortgage system is functioning much better.

However, that also means that it’s that much harder these days to obtain a Reverse Mortgage to help pay bills and other expenses.  No longer can you wait until your financial situation is deteriorating before applying.  It’s become essential to look and plan ahead before it’s too late.  You have to anticipate the likelihood of needing a Reverse Mortgage.   Bottom line: plan ahead.  As the saying goes, “It always seems too early until it’s too late, and it always seems too much until it’s too little.”

Fifth, Reverse Mortgages must be paid off within 1 year of leaving the home.  Lenders aren’t allowed to carry a Reverse Mortgage beyond that time.

Having 1 year to settle up a mortgage after death is generally a good thing.  But having 1 year to settle up a Reverse Mortgage after you have to enter a long-term care facility may not be.  More to the point, it can interfere with your eligibility for Medicaid and/or VA Aid & Attendance benefits.  The specifics of how this can interfere and how to plan around it is the subject for another, lengthier article.  Suffice it to say, those who anticipate the possible need for public benefits such as these, in order to help pay for their long-term care, need to engage in Medicaid and Asset Protection planning before, during and after pursuing a Reverse Mortgage.

Conclusion:  A Reverse Mortgage can be just the right tool to help provide powerful financial solutions for retirees and other people aged 62 or older.  Together with other legal and financial tools, the powerfulness of the eventual solution will likely surprise you.

Kathy Nitz is the Lead Benefits Advocate for GolderCare Solutions. She uses her wealth of knowledge and experience in benefits planning to advocate for seniors and those who are disabled.  You can reach GolderCare at (309) 764-2273 and learn more at www.goldercare.com.