Is a Reverse Mortgage a viable planning tool?

[2HOTinPHX]

https://www.early-retirement.org/forums/showthread.php?p=1214332

Here is a good example from our dearly departed friend imoldernu on what can happen if you have a spouse and don't protect some money in house equity and need Medicaid help.

 

[sengsational]

A friend of mine depleted all his savings, sold his coin collection and anything else of value he had just to get by. He is living on SS and food stamps. All he had left was his house so he obtained a RM. He has no heirs so the company will just take ownership of the house when he dies. As a last resort, for him this move may have made sense. This gave him some income that he sorely needed. For most anyone else, these expensive loans don't make much sense at all IMO.

This scenario makes perfect sense....someone needs living expenses, so they tap their home equity. Their asset allocation is 100% house, 0% cash, 0% investments, sure, tap your home equity, it's your only choice besides cat food.

The OP's asset allocation, will have $600K in cash after he sells his first house, so not cash strapped. Even after dropping a down payment on a house, not cash strapped. I just don't see a reason for a reverse mortgage in this scenario. Possibly some misguided fear of owing something to the bank?

 

[Markola]

This scenario makes perfect sense....someone needs living expenses, so they tap their home equity. Their asset allocation is 100% house, 0% cash, 0% investments, sure, tap your home equity, it's your only choice besides cat food.

The OP's asset allocation, will have $600K in cash after he sells his first house, so not cash strapped. Even after dropping a down payment on a house, not cash strapped. I just don't see a reason for a reverse mortgage in this scenario. Possibly some misguided fear of owing something to the bank?

No, my question isn’t coming from a place of fear but rather slyness . I just wondered what folks thought about the idea, 13 years from now, to use 1/3 of our projected home equity in the form of a reverse mortgage loan to pay off the first mortgage balance and thus add $1,500/month to our spending. It’s just a hypothesis and would be a nice-to-have in our situation with no heirs, not a necessity.

I think I’m learning from this string that RMs are complicated; suspicious as is anything sold on late night TV by washed up celebrities; there are better ways to accomplish the same goal; and 13 years is a long time with a lot that can and will happen in the meantime. However, it would still be interesting to learn if people are using these things satisfactorily as an optional, creative, financial planning tool vs. a desperate last-ditch effort to create cash, which is not the scenario I’m asking about.

 

[Koolau]

No, my question isn’t coming from a place of fear but rather slyness . I just wondered what folks thought about the idea, 13 years from now, to use 1/3 of our projected home equity in the form of a reverse mortgage loan to pay off the first mortgage balance and thus add $1,500/month to our spending. It’s just a hypothesis and would be a nice-to-have in our situation with no heirs, not a necessity.

I think I’m learning from this string that RMs are complicated; suspicious as is anything sold on late night TV by washed up celebrities; there are better ways to accomplish the same goal; and 13 years is a long time with a lot that can and will happen in the meantime. However, it would still be interesting to learn if people are using these things satisfactorily as an optional, creative, financial planning tool vs. a desperate last-ditch effort to create cash, which is not the scenario I’m asking about.

Thanks for the clarification. To be honest, I would put RMs in the category of "if all else fails." I'm certain that shows my bias. But, IOW, I would not retire if I had any other use for an RM than as a last resort. Sorry if that sounds judgmental. It is not meant to be. (Heh, heh, by the way, I still love Tom Sellek and, believe it or don't, I WATCH his RM commercials just to see him again! I watch Blue Bloods which is still a current show - along with reruns.) YMMV

 

[youbet]

But, IOW, I would not retire if I had any other use for an RM than as a last resort.

The discussion is getting a bit confusing (at least for me) because some folks are generalizing RM's to the broader category of any type of equity harvesting from a home. Are you saying you wouldn't retire if you needed to include the use of an RM (specifically) as part of your planning or are you saying you wouldn't retire if you needed to use any home equity (regardless of how made available) as part of your planning?

 

[youbet]

13 years from now, to use 1/3 of our projected home equity in the form of a reverse mortgage loan to pay off the first mortgage balance and thus add $1,500/month to our spending.

there are better ways to accomplish the same goal

Bottom line is you'd increase spending by spending some of your home equity every month. There are likely other ways to do this than using an RM.

We used an RM for my MIL when she needed a boost in spending money late in life and it worked out very well. It cost several kilobux more over the several years it was in place than other alternatives we considered. But, it was "arm's length" in terms of family dynamics with her being independently in control of the situation and nobody else in the family affected by value fluctuations of her condo, etc.

RM's are like annuities. Some are OK, even helpful, in specific circumstances.

 

[Walt34]

This scenario makes perfect sense....someone needs living expenses, so they tap their home equity. Their asset allocation is 100% house, 0% cash, 0% investments, sure, tap your home equity, it's your only choice besides cat food.

This works but only for as long as one's health remains good enough to live independently. It was the situation with FIL years ago. He had about 10k in cc debt (almost all from prescription medications) virtually no savings, but a paid-for house with a market value of a bit over $250k. SIL suggested a RM but fortunately the banker FIL was dealing with (a guy right out of Jimmy Stewart's character in "It's a Wonderful Life") had some horror stories to set her straight, and as a result he said "We won't even sell that product". While they may be scarce, there are ethical bankers out there. Anyhow....

In FIL's case he did in fact have a severe health crisis and had no choice but to go into full time nursing care about six or eight months later. Had he taken out a RM his options would have been severely more limited than they were, and we were able to get him into a very nice, albeit expensive, nursing home for the final ten months of his life. I shudder to think of what would have happened had he not had that equity to make use of.

Most of us hope that when "That Time" comes, we can pass away peacefully in our sleep. Few are that lucky and without a large wad of cold hard cash the end can be pretty miserable. In my job I saw some examples of how miserable that existence can be.

 

[Markola]

Thanks for these thoughtful comments, which are enough to dissuade me from thinking these things are a viable planning tool for all situations except the most dire, which I hope to avoid, of course. The analogy for RMs above with annuities seems about right, given this discussion, with their efficacy ranging from “helpful as a very last resort” to “dangerous Voodoo to avoid at all costs.”

I’m glad to learn that Tom Sellek still has other side hustles going besides hawking dangerous products. More power to him and caveat emptor to everyone else.

 

[brett]

Wait ten years, then re-assess. Time can change everything.

There is a reason why selling RM's yield high commissions for their sellers.

 

[PartIrish]

Markola,

Have you tried out this reverse mortgage calculator? To understand the RM product, I just tried it on our home and the fees, which essentially discount the home value, are pretty high--$20K on a $600K home. Home values in our area have increase on average >6 percent/year since 2000, so the bank would definitely be the winner on a RM here.

https://www.reversemortgage.org/about/reverse-mortgage-calculator/

 

[Markola]

Markola,



Have you tried out this reverse mortgage calculator? To understand the RM product, I just tried it on our home and the fees, which essentially discount the home value, are pretty high--$20K on a $600K home. Home values in our area have increase on average >6 percent/year since 2000, so the bank would definitely be the winner on a RM here.



https://www.reversemortgage.org/about/reverse-mortgage-calculator/

No, I wasn’t aware of that calculator, so thanks. It’s pretty slick and I played with several scenarios. Basically, I found I couldn’t borrow enough upfront cash to payoff the remaining projected mortgage balance 13 years from now, so it answered my original question.