Is a Reverse Mortgage a viable planning tool?

[Markola]

We are a couple in our mid 50s with no kids and so no legacy/bequest aspirations; we have no debt except a 30 year fixed mortgage at 3.68%; we like our walkable, college neighborhood with its amenities a lot. We refinanced this year and the appraisal was $535,000. We took some cash out to do some work, which ought to raise the value to $600K. According to Zillow, this house’s value has been appreciating 4.25%/year on average for the last 25 years, as far back as the sales records show, in line with the desirable neighborhood in this growing metro area.

Our plan assumes we keep the mortgage for the full 30 years. Even if we can afford the mortgage, however, it helps the portfolio projections a lot if we can be creative to make the mortgage payments stop in about 13 years at around age 67. Ways that we could do that include selling and downsizing or renting it out profitably and living somewhere else. Another idea is to take out a reverse mortgage for the estimated $250,00 loan balance at that time. At 4.25% continued annual growth for 13 years, the house ought be worth about $1 million, so we’d have $750,000 equity. If we were able to stay in the house 30 years until age 84 for me, it would be worth $2 million. Doubtful we could stay that long given the stairs and ability to keep the yard up, but that’s the math.

Does anyone have advice to help us evaluate the option of taking a $250,000 reverse mortgage 13 years from now to pay off the fixed mortgage at my age 67/DW age 70, if we decide then that we want to live in the same house another decade or more? Thanks.

 

[REWahoo]

Why not refinance now for 15 years instead of 30? Looks like you can get a sub 3% rate and probably not see much increase in your current monthly payment.

 

[Markola]

Why not refinance now for 15 years instead of 30? Looks like you can get a sub 3% rate and probably not see much increase in your current monthly payment.

Yes, we did look at that. We are mostly living off our our portfolio now and a 15 year mortgage takes an uncomfortably large bite out of the portfolio early on vs. spreading it all out for 30 years.

 

[OldShooter]

... Does anyone have advice to help us evaluate the option of taking a $250,000 reverse mortgage 13 years from now ...

WADR IMO it is silly to even think about precision planning that far out. There are so many things that can happen to you, your health, your house, your city, your neighborhood, to interest rates, to inflation, .... that you might as well consult the magic 8-ball. The answer will be equivalent quality to any other answer you might get.

With regard to predicting the appreciation rate of your house for the next 30 years, remember Taleb's turkey: https://www.businessinsider.com/nassim-talebs-black-swan-thanksgiving-turkey-2014-11

 

[ShokWaveRider]

Aren't Reverse mortgages just high(er) interest loans? Loans where payoff can be deferred.

 

[frayne]

Dave Ramsey isn't a big fan of RM for various and sundry reasons.

 

[Sunset]

Seems risky to me to treat the house as a piggy bank, when finances are a bit short for the long term.

A reverse mortgage certainly is useful in some circumstances, usually dire ones, as the cost is high.

I wonder if OP is considering delaying SS until 70, instead of 67, at least for the higher earner person, as income later in life seems to be an issue.

I used to think housing always went up, but the National housing collapse cured me of that thinking. Out place is worth about what we paid almost 20 yrs ago.

 

[ShokWaveRider]

Our home in Florida has only gone up ~25% in 13 years. Certainly not as good as our previous home in California that went up almost 300% in 10 years.

Even so, we think a reverse mortgage is a bad idea unless one is poor and/or at the very end of their life and need the money for day to day expenses. But there again if one is at the end of their life, it may pay to just sell the home and move into a care home. Certainly not for a source of funding for retirement. Just opinion, we could be wrong.

 

[OldShooter]

... I used to think housing always went up, but the National housing collapse cured me of that thinking. Out place is worth about what we paid almost 20 yrs ago.

Housing costs are very spotty and subject to bubbles, but if you zoom back to look at the whole picture it is clear that overall residential housing costs cannot rise much faster than national personal income, which has hardly moved in real terms for decades (https://fred.stlouisfed.org/series/MEPAINUSA672N).

So the way to make money in residential real estate is to get lucky rather than getting unlucky and to leverage all lucky investments.

It's strictly a spectator sport for me but a look at Toronto, San Francisco, Seattle, etc. would not make me optimistic. Reversion to the mean lurks. Worse, to look at the near-bankrupt states and cities I would be ringing alarm bells. YMMV of course.

 

[walkinwood]

What is the plan if you need to move to full-time assisted living after you sign a reverse mortgage?

 

[sengsational]

Reverse mortgages are not your friend. A HELOC is preferred, because it's cheaper when it comes to fees and rates.

 

[Markola]

I appreciate all the many responses and questions. Our plan’s success rate is currently 90%+ even with keeping the mortgage, so we’re not on the edge. In the event the mortgage becomes a burden, we’d take one of several actions to solve the problem, i.e. sell and move, rent it out and move, or pay off the mortgage. My question was, is a reverse mortgage for 1/4 of the expected home value in 13 years another viable tool to consider, even if we’re financially strong, because, if we could eliminate the P&I that way, it results in about $1,500 more that we could spend/month, which would be nice. I was hoping someone would emerge who had used this tool but maybe it’s such a bad, high cost idea that no one from this debt-averse crowd here has. Thanks for the crowd-sourced feedback and you are probably right.

I do scratch my head at the comments above advising that one shouldn’t have confidence that home prices will increase, as one could say the same about stocks, bonds, SS, gold or anything else. I just think of my home as my real estate play in a diversified portfolio.

 

[HI Bill]

My understanding is that if you're 62 or older, you can take out a reverse mortgage, for up to 60% of the home's value. In your case, I'd see you wanting to take out a monthly amount equal to your remaining mortgage, rather than taking out a lump sum, as interest accrues from the day you get the $, and the interest rate you're paying on the RM is likely much higher than the interest rate on your mortgage.

There are a lot of potential downfalls, including the possibility that if you fail to pay your property taxes or insurance (either due to mental decline or through lack of $) or fail to maintain the house (new roof, etc.), the bank will take your home. Most on this board are dead set against RMs, and there are many valid reasons. When you sell the property, the debt for the reverse mortgage is paid off. You may not have enough assets to buy another place, and you may not be able to afford LTC. Many here recommend taking a HELOC instead.

I encouraged my father to take out a RM, in the event that he had run through his retirement account funds, and still needed $ (after age 85). It would save him from having to move out of his house, and keep him solvent. I think there are very specific instances where it's a valid, but not an ideal choice. Having this, or a HELOC as a back-up plan isn't the worst idea (which would be a lack of planning, budgeting, and relying on hope).

 

[OldShooter]

... I do scratch my head at the comments above advising that one shouldn’t have confidence that home prices will increase, as one could say the same about stocks, bonds, SS, gold or anything else. I just think of my home as my real estate play in a diversified portfolio.

With respect, that is quite a load of apples and oranges.

Start with stocks: Stocks on average go up because they represent ownership in enterprises that produce value for customers. A stockholder legally owns a tiny share of the profits made from selling that value. Some enterprises are more successful than others. That is why we diversify, but history says that more enterprises succeed than fail. Hence, the steady climb in stock prices, averaging a single-digit percentage per year. Without limit.

Bonds are simply loans. Their value won't increase, but you get interest payments. That's all. Very simple. No growth.

SS? Social Security? That's a retirement scheme controlled by the government. Not an investment. To the extent that you have confidence in the government and it's promises of inflation adjustments SS is a fine thing. But you can't invest in it.

Gold? Unlike stocks, gold doesn't produce anything of value. It just sits there. Over the long haul it has been proven to be an inflation hedge and that's about it. In the short run it's a highly volatile speculation that, because of its volatility, results in a lot of exciting success stories. But if one side of a trade is a success, the other side is not a success. So, IMO not a very good "investment."

Your house is a unique thing. It is worth only what a constrained buyer will pay for it. Said buyer is constrained by his/her income which in turn constrains your selling price. That's really all you have to know to know that house prices cannot increase independently/without limit. 4.25% growth is a nice thing and apparently enough buyers in your market have so far had the growing income to support those increasing prices, but will those buyers' income increase at that rate for 30 years into the future when the growth rate of US national household income is only growing at 1% over inflation? I certainly wouldn't invest in that premise and I wouldn't make a financial plan based on it either. IMO the plan should be that the house will not increase faster than consumer inflation.

 

[HI Bill]

Your house is a unique thing. It is worth only what a constrained buyer will pay for it. Said buyer is constrained by his/her income which in turn constrains your selling price. That's really all you have to know to know that house prices cannot increase independently/without limit. 4.25% growth is a nice thing and apparently enough buyers in your market have so far had the growing income to support those increasing prices, but will those buyers' income increase at that rate for 30 years into the future when the growth rate of US national household income is only growing at 1% over inflation? I certainly wouldn't invest in that premise and I wouldn't make a financial plan based on it either. IMO the plan should be that the house will not increase faster than consumer inflation.

I would posit that the house value is not constrained by the buyer's income. It's constrained by the buyer's assets and income. The value is affected by the cost of new home construction, the availability of homes, and a few other variables, including desirability. In these COVID times, Honolulu is seeing a downturn in entry level real estate prices as workers without jobs flee, at the same time that $1M+ luxury high rise condos are selling quickly. Neighbor islands (especially Maui, and to a lesser extent, portions of Hawii Island) are seeing big gains in certain areas, and in houses with certain attributes (houses with pool, around $1M). There is enough mainland and Oahu money to drive prices higher, even in a recession, as these folks don't need to w#rk to buy their new homes. Houses over $1.5M are moving much more slowly.

I used to posit that real estate values were tied to 'limits of affordability', which related to income. But in Hawaii, this doesn't hold true, as people tend to make things work by taking on room mates, second jobs, etc. And prices for the past 20+ years have been moving irregularly higher and higher.

In many places where labor and land are cheap, and that are less desirable, I'm sure that income is the primary driver. Not so much, for places like LA, SF, HNL, etc.

 

[OldShooter]

I would posit that the house value is not constrained by the buyer's income. It's constrained by the buyer's assets and income. ...

I think that's technically true but for single family homes in more ordinary markets, I think the dominant constraint is income. Certainly that is true for entry-level homes where down payment is the major issue.

In the big picture US residential real estate growth cannot be expected to significantly outstrip US family income. There are at least a few other things that cannot be crowded out of family spending, like food.

 

[HI Bill]

I think that's technically true but for single family homes in more ordinary markets, I think the dominant constraint is income. Certainly that is true for entry-level homes where down payment is the major issue.

In the big picture US residential real estate growth cannot be expected to significantly outstrip US family income. There are at least a few other things that cannot be crowded out of family spending, like food.

Sorry, I've been living in places with extraoridnary markets for most of my life (San Diego, Monterey, SF Bay Area, Honolulu, Maui)....so my bias is from HCOL areas. The LCOL areas I'm familiar with have property values more aligned with income and income limits applied to loans (rural CA, TX).

 

[JillPill]

Reverse mortgages are not for everyone- especially people looking to preserve equity in their homes for heirs. If you are a person- like OP - without children then the decision gets easier. (My DH and I are childless and love our many nieces and nephews very much but feel no obligation to any of them)
The home value at the start is all that really matters. If it reduces or stagnates it won't matter.
It's a great way for *some* people not *everyone* to use the substantial equity in their home while they are alive.

 

[Koolau]

Not an expert on RMs. I understand that the fees are substantial. It seems to me that a better "back up" (You know, in case you run out of money in your nest egg.) is sell your residence, live on the pile of cash - renting or significantly downsizing - and hope you kick before the pile of cash runs out.

If we can manage our own portfolio, maybe we can manage the value of our residence (at the end.) Just a thought as YMMV.

 

[sengsational]

I just think of my home as my real estate play in a diversified portfolio.

It's my opinion that this is logical thinking. One may argue about rates of appreciation and the factors that limit said appreciation, of course, but that discussion can be made for any asset class. I can make most long term plans succeed or fail by making various inflation and return assumptions. The reason why so many people like firecalc, I think, is because the best we can do is presume history will adhered to, roughly.

 

[Markola]

Reverse mortgages are not for everyone- especially people looking to preserve equity in their homes for heirs. If you are a person- like OP - without children then the decision gets easier. (My DH and I are childless and love our many nieces and nephews very much but feel no obligation to any of them)

The home value at the start is all that really matters. If it reduces or stagnates it won't matter.

It's a great way for *some* people not *everyone* to use the substantial equity in their home while they are alive.

This scenario is what I was pondering. I can certainly understand the value and mental comfort of having a paid off home. However, the long term math works better for us by keeping a mortgage, plus I’m the type who would feel like home equity of $750K and more “just sitting there untapped” would feel like a waste if I had a viable tool available to magically use $250,000 of it to make our monthly mortgage P&I payments stop. I take it from the comments that when one looks under the hood of RMs, they find that there’s more to the story than a magic free lunch, so I’m not going to build it into our plan. But who knows? 13 years is a lot of time for the rules and new RM offerings to change, too.

Others have mentioned HELOCs rather than RMs but it’s hard for me to understand the advantage of HELOC debt and its required payments vs. keeping the regular mortgage. What am I misunderstanding?

Fortunately, this idea is all an hypothesis and not a necessity to make our plan work. Thanks for helping me kick it around, everyone. OldShooter is, of course, right that trying to plan 13 years out with any detail is futile. One blown knee or some arthritis, for example, and we’re not going to like these stairs much.

 

[Badger]

I am so tired of seeing Tom Selleck on TV for the past 6 months trying to sell the idea of reverse mortgages. He comes on a number of stations a few times every hour. Any company that invests that kind of time and money to pay for that many commercials has to make the difference up somewhere. For that reason alone I would not trust they were in your best interest regardless of what ol' Tom says. A bag of magic beans for your cow may not be a good idea.



Cheers!

 

[sengsational]

Others have mentioned HELOCs rather than RMs but it’s hard for me to understand the advantage of HELOC debt and its required payments vs. keeping the regular mortgage. What am I misunderstanding?

EDIT: Never mind. You wanted a comparison of keeping the mortgage vs a HELOC. Yes, keep the regular mortgage unless you have a slam-dunk investment that can make a big rate of return. I'll leave the HELOC vs RM rant, below, because, well, it's already written.

In theory, reverse mortgages are great, but practically, they're horrible.

They are more complicated than HELOC's. And whenever "they" make a product that's complicated, they load it up with crap that's no in your best interest. So if you put a reverse mortgage and a HELOC side-by-side, they do the same thing, but the expenses, fees and rates are totally one-sided against the RM. What's hard to do is get the real numbers for a reverse mortgage (they don't want you to have them). But if you ever did get all of the costs, all of the "gotchas", all of the rates, and put them side-by-side with a HELOC, you'd see, I'm pretty sure of it, that the HELOC wins, hands-down.

 

[H2ODude]

I am so tired of seeing Tom Selleck on TV for the past 6 months trying to sell the idea of reverse mortgages. He comes on a number of stations a few times every hour. Any company that invests that kind of time and money to pay for that many commercials has to make the difference up somewhere. For that reason alone I would not trust they were in your best interest regardless of what ol' Tom says. A bag of magic beans for your cow may not be a good idea.



Cheers!

+1,000. Never could stand the guy especially after he was caught stealing water from the local water utility. Those ads try to make him seem so trustworthy. They have the effect of me concluding that RM's are scams. May not be, but that's my opinion. Maybe he can sell payday loans too.

 

[Markola]

Well, I like to keep things simple and understandable, so these recent comments above about hidden this or that or scammy infomercials are enough to put me off. I don’t have cable so I haven’t seen Tom Selek’s sales job.