Reverse Mortgages Now Good per Scott Burns

[2B]

Hopefully, the link to his article will get posted without any problems. Sometimes I have had problems.

Reverse Mortgages: Their Time Has Come - Registered Investment Advisor

In this he links to a JPF article touting how retirees can boost their SWR up above 6% with a reverse mortgage. I went to the article and the only think I saw was the paper increased a retirees portfolio of $800,000 with the max Federal reverse mortgage of $417,000. They then ran their version of FIRECalc and showed how a portfolio of $1.2MM could increase the SWR when the amount used to calculate the percentage was the original $800,000. Since the $417,000 never changed but inflated withdrawals did, the reverse mortgage at the end failed to support spending above 4.5% when calculated based on the $800,000.

I'm sure someone else will read through this article to see if I missed something in my quick read.

If I did get it right, this article is useless garbage. It's below the level that I would usually associate with the JFP although I have read some stinkers.

Unfortunately, this provides FPs additional info to through at mathematically challenged retirees to get them to "fee up" with a reverse mortgage to continue a lifestyle they can't afford. I didn't see anything in this article that would change my opinion that once the question of a reverse mortgage comes up a person is in a lifestyle they can't afford.

 

[Texas Proud]

IMO a reverse mortgage is one of the worst things you can do...

It locks you into a home where you might not want to be... things change in life and being able to move to another location should be in everybody's plan...

 

[73ss454]

If all else fails it's nice to know that the house is there to draw off of if need be.

I see a lot of actors hawking these RM's on TV, there must be a lot of fees involved.
Maybe I'll just use a Heloc if it ever comes to that.

 

[Zero]

My DW's elderly aunt has reached the age of 81 and finds herself in fairly dire straits so she is definitely living a life she cannot afford. Trying to get by on $1,100 or so a month. Listening to my wife's recollections of her, she seems like the best of people and just arrived where she is.

She might be the exact right person to benefit from a RM. Let's face it, if the choice is between some high fees and not eating, things come into perspective fairly quick.

 

[veremchuka]

My DW's elderly aunt has reached the age of 81 and finds herself in fairly dire straits so she is definitely living a life she cannot afford. Trying to get by on $1,100 or so a month. Listening to my wife's recollections of her, she seems like the best of people and just arrived where she is.

She might be the exact right person to benefit from a RM. Let's face it, if the choice is between some high fees and not eating, things come into perspective fairly quick.

Yeah for someone that has no other choice I think a RM can be a life saver but it is not something to just do unless you really need to. The title of the thread surprised me as I always felt a RM was an expensive lousy deal and it sounded like somehow that has changed but I see the article is in doubt as to creditability.

 

[2B]

My DW's elderly aunt has reached the age of 81 and finds herself in fairly dire straits so she is definitely living a life she cannot afford. Trying to get by on $1,100 or so a month. Listening to my wife's recollections of her, she seems like the best of people and just arrived where she is.

She might be the exact right person to benefit from a RM. Let's face it, if the choice is between some high fees and not eating, things come into perspective fairly quick.

But the house is her LAST asset. Once she consumes the asset there is nothing left for assisted living or nursing care. Medicaid will cover her is a pretty low end nursing home but nothing would cover assisted living. Your DW's aunt is living beyond her means. Her best route is to SELL and not continue spending living beyond her means.

 

[Texas Proud]

But the house is her LAST asset. Once she consumes the asset there is nothing left for assisted living or nursing care. Medicaid will cover her is a pretty low end nursing home but nothing would cover assisted living. Your DW's aunt is living beyond her means. Her best route is to SELL and not continue spending living beyond her means.

EXACTLY!!!!

And she should have done it a long time ago.... when she actually had some money...

To me, a RM is like.... I am cold, and look at all of this wood in my house... let me burn some of it so I can be warm.... soon, you have no house and you will be cold...


Now, if she were terminal and only had 6 months or so to live... and people said 'let her stay where she has been for 30 years'.... I can see that... but someone who might live another 20 years Nope...

 

[Walt34]

But the house is her LAST asset. Once she consumes the asset there is nothing left for assisted living or nursing care. Medicaid will cover her is a pretty low end nursing home but nothing would cover assisted living. Your DW's aunt is living beyond her means. Her best route is to SELL and not continue spending living beyond her means.

That's where we are now with DW's father. He's been living beyond his means for the last few years and is now running into the crunch, he's about to lose his driver's license, his car is on it's last legs and he can't afford even a used replacement. So staying in the house is soon going to become impossible anyway.

A few years ago one SIL briefly suggested a RM and both I and FIL's banker nixed that idea because of the reasons mentioned. The banker is straight out of It's a Wonderful Life and they won't even sell that product because it's such a bad deal for the customer.

Nice to know that not all bankers are evil money-grubbers.

 

[fritz]

But the house is her LAST asset. Once she consumes the asset there is nothing left for assisted living or nursing care. Medicaid will cover her is a pretty low end nursing home but nothing would cover assisted living. Your DW's aunt is living beyond her means. Her best route is to SELL and not continue spending living beyond her means.

EXACTLY!!!!

And she should have done it a long time ago.... when she actually had some money...

To me, a RM is like.... I am cold, and look at all of this wood in my house... let me burn some of it so I can be warm.... soon, you have no house and you will be cold...


Now, if she were terminal and only had 6 months or so to live... and people said 'let her stay where she has been for 30 years'.... I can see that... but someone who might live another 20 years Nope...

It would make no sense to continue down a path to disaster (with a reverse mortgage).

 

[youbet]

Clearly, RM's are not appropriate in all situations. But a broad brush condemnation seems inappropriate too.

MY MIL's RM seems to be working fine. Her 4 children looked over all the alternatives, pros and cons, etc. and decided that it was the way to go. She was 83 when she initiated it and is 87 now.

There are clearly pitfalls, as stated in the above posts, to be avoided. Staying in an expensive-to-own home when you should be downsizing is on the top of the list IMO. But situations can exist where the RM works fine, especially if you think the few thousand in fees is worth avoiding sibling negotiations over who is paying what for mom. RM's are worth checking out.

I wouldn't recommend an RM as part of a FIRE plan, however.

 

[2B]

Clearly, RM's are not appropriate in all situations. But a broad brush condemnation seems inappropriate too.

MY MIL's RM seems to be working fine. Her 4 children looked over all the alternatives, pros and cons, etc. and decided that it was the way to go. She was 83 when she initiated it and is 87 now.

There are clearly pitfalls, as stated in the above posts, to be avoided. Staying in an expensive-to-own home when you should be downsizing is on the top of the list IMO. But situations can exist where the RM works fine, especially if you think the few thousand in fees is worth avoiding sibling negotiations over who is paying what for mom. RM's are worth checking out.

I wouldn't recommend an RM as part of a FIRE plan, however.

It's very generous of you to be ready to cover her assisted living expenses.

 

[haha]

I suppose Scott now has a business affiliation with some reverse mortgage purveyors?

Charlie Munger says that to explain 99% of behavior all you need do is discover the force field of incentives. Once these are known, predicting behavior is almost a lock.

Munger days that he believes he is much more aware and OK with this than most others, but he is frequently surprised by how he rarely goes far enough. Like he is saying, sure, I am cyncial, and likely a lot more cynical than others, but really it is imposible to get down to the bare rock of cyncism.

As my sig says, and I firmly believe, "there's nothing to live with but mendacity, is there?"

 

[youbet]

It's very generous of you to be ready to cover her assisted living expenses.

How would that be different if we had sold her modest one bedroom condo and used that money to pay rent on a one bedroom apartment?

The real calamity to watch out for is continuing to work and live in the same place because of elder care situations........

 

[Zero]

But the house is her LAST asset. Once she consumes the asset there is nothing left for assisted living or nursing care. Medicaid will cover her is a pretty low end nursing home but nothing would cover assisted living. Your DW's aunt is living beyond her means. Her best route is to SELL and not continue spending living beyond her means.

Her two best chances of selling the home are slim and none. The town she lives in is very small and as the wife said. "probably hasn't had a new resident in 10 years.".

 

[Zero]

I'm still not convinced. As I see it on most web sites, the max RM fees on a $150,000 house are $6000 and the amount of loan might be $106,000 so the aunt gets $100,000 cash in hand AND gets to stay in her home. Zero impact to her.

If she annuitizes that $100k, according to immediate annuities (yes, dreaded fees), she will get $916 per month to almost DOUBLE her income.

AND, now she has $2,000/month (new $916 plus her existing $1,100 income) for life to pay for nursing home and assisted living.

How would selling beat that. She'd likely have minimum cost of $20k in cleaning up, new carpet, clearing out attics, paint, yard improvements.

What 81 yo wants to take on that? AND, what would she gain? She'd now be out on the street looking for a condo or apt, with moving costs, deposits, etc. She'd have rent and renters insurance that would like be higher than her previous tax/ins.

Don't see the advantage to selling for her.

 

[arebelspy]

AND, now she has $2,000/month (new $916 plus her existing $1,100 income) for life to pay for nursing home .

She has to continue living in the house for a RM, I believe.

 

[harley]

She has to continue living in the house for a RM, I believe.

Yes, Zero, it sounds like you are talking more about something like a cash out refinance. Followed by walking away from the mortgage. Can you get a lump sum out of reverse mortgage? If so, it does sound like a decent deal for Auntie.

 

[Texas Proud]

I'm still not convinced. As I see it on most web sites, the max RM fees on a $150,000 house are $6000 and the amount of loan might be $106,000 so the aunt gets $100,000 cash in hand AND gets to stay in her home. Zero impact to her.

If she annuitizes that $100k, according to immediate annuities (yes, dreaded fees), she will get $916 per month to almost DOUBLE her income.

AND, now she has $2,000/month (new $916 plus her existing $1,100 income) for life to pay for nursing home and assisted living.

How would selling beat that. She'd likely have minimum cost of $20k in cleaning up, new carpet, clearing out attics, paint, yard improvements.

What 81 yo wants to take on that? AND, what would she gain? She'd now be out on the street looking for a condo or apt, with moving costs, deposits, etc. She'd have rent and renters insurance that would like be higher than her previous tax/ins.

Don't see the advantage to selling for her.

A RM is just that... where they pay you monthly.... not a lump sum...

At least that is what I have read about them... so she can not buy an annuity, the RM IS her annuity...



Edit to add.... looked up a few things...

"Interest
A reverse mortgage accrues interest just like a traditional mortgage except that the homeowner is not making payments (interest or principle) each month to reduce the loan balance. As a result the loan balance grows until the homeowner permanently moves out of the property or passes away."


So you have to live in the home...


"The homeowner receives payments on flexible terms:

• Credit line for emergencies
• Monthly payments
• Lump sum distribution
• Any combination of the above"

But I was wrong on the payment...

 

[Quantum Sufficit]

I completely disagree that a reverse mortgage cannot be used to one's advantage, if one is sure they are staying put after 62 years of age. I am damn sure I am. We have no heirs. I look at my fully paid for house as equity I would otherwise have no access to without a reverse mortgage. I can cash out a lump sum. Who cares what the fees are. come on!! Use your head. If you have no heirs, are staying put, I get a tax free 200k to add to my portfolio at age 62. Can you say...BONUS! A lot of us self employed fools don't have government pensions to rely on so I really don't see a downside.

 

[MichaelB]

I completely disagree that a reverse mortgage cannot be used to one's advantage, if one is sure they are staying put after 62 years of age. I am damn sure I am. We have no heirs. I look at my fully paid for house as equity I would otherwise have no access to without a reverse mortgage. I can cash out a lump sum. Who cares what the fees are. come on!! Use your head. If you have no heirs, are staying put, I get a tax free 200k to add to my portfolio at age 62. Can you say...BONUS! A lot of us self employed fools don't have government pensions to rely on so I really don't see a downside.

QS, no one said a RM can't be an advantage in the right circumstance, but it does not look like a good way to get the equity value out of a house if needed. You may wish to stay in your house but a slip in the bath or on the stairs may change that permanently. One downside I see is a RM only generates cash of 2/3 of the market value of the house and there is no guarantee the homeowner will ever see the remaining 1/3. If the house is worth $400K that could be over $100K left on the table.

Not sure what you meant with the last comment.

 

[Midpack]

I consider RM among my plan C options...why rule it out as a last resort?

 

[donheff]

You may wish to stay in your house but a slip in the bath or on the stairs may change that permanently. One downside I see is a RM only generates cash of 2/3 of the market value of the house and there is no guarantee the homeowner will ever see the remaining 1/3. If the house is worth $400K that could be over $100K left on the table.

There is the rub. DW's MIL insisted on staying in the house even though it was clear that assisted living was in their future. A year after starting the reverse mortgage, DW's father deteriorated to the point that they had to move. Luckily there was sufficient value left to cover the entry costs of the facility they entered but a few years along and that would not have been the case. Figuring how to handle those last few years are the killer (no pun intended).

 

[rescueme]

Figuring how to handle those last few years are the killer (no pun intended).

That's reality - nothing more nor less.

Let us all be "lucky" in our end-of-life decisions...

 

[Zero]

Yes, Zero, it sounds like you are talking more about something like a cash out refinance. Followed by walking away from the mortgage. Can you get a lump sum out of reverse mortgage? If so, it does sound like a decent deal for Auntie.

Exactly, thanks.

I'm suspecting she is OK healthwise for maybe another 6-8 years, and in that time comfortably in her home with either a big $100,000 lump sum in the bank or an annuity from the $100,000.

If she suddenly needs a nursing home, she has $100,000 to get into the better homes and spend that down till Medicaid will kick in.

So given the facts that an outright home sale is unlikely in her town, and that a home sale would mean moving to another home and paying rent, yeah, RM is like a HELOC that doesn't have to be paid back till she moves.

She has no heirs.

 

[tryan]

To me, a RM is like.... I am cold, and look at all of this wood in my house... let me burn some of it so I can be warm.... soon, you have no house and you will be cold...

Seems more like - I am cold, I live on a wooded acre of land ... let me cut a cord of wood from the woods .... it'll grow back ... it will be there forever for me. And I am never cold again.