In my 10 years of reverse mortgage experience, the biggest mystery to me has been why so many clients are so emotional—and downright fearful—about using their home equity to have a better retirement, but they think nothing of taking money out of IRAs or other retirement vehicles.
Let’s start with the facts. The average senior has half their net worth tied up in their home. If that money is off limits, then they have to make do with half a retirement. However, experienced advisors know that if this equity is put into an increasing line of credit with a HECM at age 62, it can double or triple when the client gets to their 80s and 90s, just when they may need the money most. More importantly, if the reverse line of credit withdrawals is used at the same time as IRAs and annuities, then all of that money will last many years longer and ensure that the client will not run out of money before they run out of life.
It is a clear and safe choice for most seniors. So why have only 2 to 3 percent of eligible seniors taken out a reverse mortgage? I believe it is because of fear and emotion, because it is obviously not math and logic.
In this article, I will attempt to define the “why” behind this mental block and suggest ways that originators can help clients break past that fear and rely on logic instead of emotion when deciding how best to use all of their retirement assets.
Fear No. 1 *I’m afraid I won’t be able to pass my home “free and clear” to the next generation. I feel I am shortchanging my heirs.
Fear No. 2 * I’m afraid the bank will kick me out of my home in my later years, and if they don’t, I’ll be upside down on the mortgage. (There is an intense fear of losing equity that seems to outweigh gaining cash.)
Fear No. 3 *Conventional Wisdom: This isn’t how it was done in the past, and I fear new products. Home equity is my “sacred cow.”
Fear No. 4 *I fear this is a loan of last resort, and if I do it, it’s a sign that I’ve failed in my retirement planning. Besides, no one else is doing it. In fact, my cousin, attorney, newspaper, etc. said I should stay away from them.
Here are some answers we can give our senior clients when these fears are raised.
Responding to Fear No. 1: The Next Generation
An article by Ron Lieber appeared in The New York Times on September 19, 2014, titled “Parents, the Children Will Be Fine. Spend Their Inheritance Now.” It evoked some emotional comments that tell you how strongly the public feels about this topic. To combat this, we must encourage our clients to get their children involved early. The majority of adult children tell their parents, “Mom, Dad, take care of yourselves. It is your money and you should spend it. If there is some left, we will appreciate it, but we don’t expect it.” Parents who hear that from their children feel more comfortable about going on the cruise or spending a little more on dinners out.
But there is a larger issue here. If parents truly want to leave their children an inheritance, real estate is not the most efficient way to do it. They can leave them cash, life insurance or other investment accounts that are immediately useful. Real estate requires cash for taxes, maintenance and utilities and may take years to sell. Besides, everyone knows someone who lost a “free and clear” house to long-term care expenses at the end of their life. And, our clients need to be reminded that only 1 to 2 percent of children actually keep their parents’ home—most sell it as fast as they can. Why not just give them the cash in the first place and spend the home equity? In fact, instead of making your mortgage payment, send the check to your children. If the goal is to give home equity to responsible children, don’t wait; do it now!
Responding to Fear No. 2: I’ll Lose my Home
We must remind our senior clients a dozen times that they cannot lose their home because of the mortgage balance. Period. Be transparent. Show them what happens if they use all their credit line, if home values soar with inflation or crash with deflation. Explain what “non-recourse” means. Furthermore, explain the non-borrowing spouse issue and how it is no longer a factor since the FHA rule change in August of this year. Give examples of some of your clients who have passed away owing more than the value of their home and how the family benefited from the HECM that was in place. Remind them that the reverse mortgage is the only mortgage in the world that is owed by the house—not a person or the heirs. And if the house doesn’t have enough money at the end, the FHA insurance fund pays the difference. Many seniors think of a HECM as risky when in reality there is is no safer financial product out there.
Responding to Fear No. 3: Conventional Wisdom
It is critical that we separate the home from the home equity. You can safely spend your home equity and yet stay in your home for the rest of your life, so long as you continue to pay your taxes just like you would if you didn’t have a mortgage. Here, it is helpful to ask your client a few questions: Do you really want to retire with half the amount of money that you have in your net worth? Do you want to leave stacks of cash in your living room, untouched? The IRA is no more sacred than your home equity. In fact, in some instances it is a little more dangerous to use because when you take out too much, you may lose a portion to taxes, while your reverse line of credit has no taxable effects. You have spent your working life putting money into your IRA and retirement accounts so you could have it at the end of your life. You have done the same as you pumped cash into your home by making payments, taking care of maintenance, paying taxes, etc. Now the reverse mortgage is nothing more than a tool to access the money (home equity) you have saved for retirement. The government has created a guaranteed means to access those funds. The home is still sacred and kept safe, and the equity is spendable. We need to help our clients see the difference. Home is where the heart is, but home equity is where the money is!
Responses to Fear No. 4: The Loan of Last Resort
After we have addressed all the emotions that come to light when discussing the first three concerns, the fourth concern needs to be addressed using logic and facts. Lots of research has been done in the area of wealth management and all of us are (or should be) familiar with Sacks, Salter, Evensky and Texas Tech University. The research has been documented in the Journal of Financial Planning over the last couple of years. The best time to get a reverse mortgage is at 62 and, while we can help someone who is 92 and in foreclosure, we could have helped our client avoid a disaster if they had come to use well before the reverse was needed. Buy the umbrella before it starts to rain. While all of us feel good about saving a senior’s home from foreclosure, it makes a lot more sense to avoid the accident before it happens. Be prepared with this information. Make sure you fully understand it so you can explain it your client. Better yet, be prepared to educate the attorney, financial planner, insurance agent, accountant, etc. If a client tells me that someone else told them a reverse mortgage is not something for them, I always ask who it is and then try to schedule a meeting with that person so that I can stop misinformation at the source. If all of us do this, armed with the correct information, we will educate hundreds of trusted advisors every year.
Even with 10 years of experience, I still struggle to get beyond these emotional and psychological barriers with my senior clients every week. I don’t claim to fully understand it, nor do I have all the answers, but I know the thoughts above will make sense to most seniors. I invite you to email The Reverse Review and share your ideas about how we can step over common mental roadblocks that stop our clients from having a better retirement.