As an Ohio Certified Reverse Mortgage Consultant for the leading national reverse mortgage lender, I deal with an abundance of misinformation regarding the HUD regulated Home Equity Conversion Mortgage…better known as the reverse mortgage. It is not uncommon that people tend to piggy back on what they’ve “heard” or “saw” in an ad when arriving at conclusions about the reverse mortgage, as opposed to researching the details before they form a decision as to how the reverse mortgage might serve them. Unfortunately when decisions are based on inaccurate or partial information…no one benefits.

To accurately assess the cost of any financial product the full cost spectrum should be evaluated, including opportunity costs. Specific questions also need to be raised. For instance, is the homeowner age 62 or 92? Is the homeowner (s) planning to live in the home for only 2 years, or the remainder of their life? Do the homeowners have living heirs to whom they would like to pass the estate gradually, now or in the future? Are they in jeopardy of losing their home to foreclosure because they cannot make monthly payments? These and other considerations should be fully explored before implying that a financial product is good or bad…and the reverse mortgage is no exception.

For example, how many of us choose to have children knowing full well how incredibly expensive it will be to raise them? Furthermore, some people prefer to own or drive a Mercedes over the less expensive KIA, so why isn’t anyone writing articles to protect these susceptible buyers from getting ripped off by unscrupulous Mercedes dealers? Shouldn’t someone warn these buyers to first consider buying a cheaper vehicle with a solid warranty? Imagine the many thousands of dollars that these consumers would save if they were more informed and chose the cheaper path.

These are over-the-top metaphors chosen to illustrate how ridiculous it would be to assume that one shoe size fits all. So why do many so-called experts condition seniors and others to believe that tapping home equity with a reverse mortgage should only be a last resort…despite the fact that millions of homeowners have lost nearly $6 trillion in home equity since 2008. Where did the sacred cow go? What about all those bullet proof retirement plans that collapsed and lost billions despite all the expert advice and planning by trusted advisors? Many fail to understand that equity is essentially an asset that does NOT earn a rate of return….zero-zilch. Moreover, millions of senior homeowners have already lost far more value than the cost of securing a reverse mortgage.

What if a homeowner owning a $150,000 home free and clear has no children…should they be automatically discouraged from opening a reverse mortgage to use “a portion” of their equity based upon “today’s” value (with no monthly payment)…to enhance their retirement lifestyle? Furthermore, would it make any sense to sell a home today for $150,000 and agree to delay collection of the debt until 15 years later, and then collect only the original $150,000 principal amount? Of course not! Why, because the effect of inflation causes the dollar to erode in value over time. So why do members of our media and financial arena perpetuate the myth that equity should be “preserved” for the seniors…and the benefit of loved ones (estate). In many cases, the truth is the opposite message. To utilize the full benefit of an asset like equity, perhaps the optimal “financial” choice would be to liquidate and immediately put it to work to grow more wealth. Many have come to the realization that the crystal ball of forecasting property value is broken.

Another illustration worth sharing while addressing inflation is the the “time” value of money, or sometimes referred to as opportunity cost. Example: After graduating from college at the age of 22, Mary began investing $2,000 every year and then stopped at age 30.  Her brother Terry did not begin investing until he reached age 30, but he invested the same amount over his next 35 years. Mary and Terry received identical compounding annual rates of interest, so who came out ahead? Mary did…that’s the power of putting money to work sooner rather than later.

Let’s take a look at some other examples of the use of home equity without monthly payments (i.e. reverse mortgage):

A 69 year old surgeon accumulated significant savings and retirement investments and wanted to retire. Unfortunately he owed $300,000 against his $600, 000 home and was not able to ‘comfortably” retire until he eliminated his monthly mortgage payment. That would take another 5-6 years to achieve. Following a recommendation from his advisor, he secured a reverse mortgage to eliminate his monthly payment and immediately begin enjoying his retirement (life) with his spouse. By the way, his only loss of equity was the financing of transaction costs associated with the reverse loan. However, his interest rate was less than 3% and he was able to use the amount he was paying monthly to invest elsewhere in tax free bonds. It was his choice to use his money in a way that created a more enjoyable and comfortable retirement.

Many seniors want only to make a difference in their children’s or grandkids lives TODAY rather than wait until they pass. While they clearly understood the higher costs associated with the reverse mortgage, they also understood that today’s dollar would buy much more than it would in ten years. They determined that gifting today would leverage the children’s ability to build for their retirement, and they realized that there was no guarantee that the value of their home would increase for many years to come.

The important part of originating the reverse mortgage is to educate seniors and their families on all the components, and avoid limiting discussion to what some might consider good or bad features. Seniors or their loved ones should determine whether the reverse mortgage is a suitable option for them or their family. Seniors are smart and they are often savvier with their money than the younger generation. Seniors may be physically less agile, but mentally, many are much wiser than we are led to believe. Based upon the billions of retirement savings lost in 401k’s, one might question whether the younger generation is the more susceptible to spin and empty promise.

A leading national reverse mortgage lender can often be a good starting point for learning more about the FHA reverse mortgage. Large national reverse mortgage lenders will generally require that the homeowner complete a counseling session with a HUD approved third party agency before they take an official application. This ensures that senior homeowners are fully apprised of financial alternatives before deciding on the reverse mortgage solution. Seniors in Ohio have recently seen an uptick in the use of reverse mortgages to avoid potential loss of their property, or to free up a portion of their equity to cover growing monthly expenses. Seniors throughout the nation are finding their ideal financial solution to be the FHA reverse mortgage | HECM.