Why so few? It’s complicated.

Why so many don’t consider a reverse mortgage.

“The numbers are worrisome. The typical 54- to 64-year-old with a 401(k) or IRA owns a median portfolio worth about $135,000 and more than a quarter of workers don’t have retirement savings accounts”, writes Chris Farrell in his column Is This a Good Time to Get a Reverse Mortgage in Next Avenue.

Considering the stark figures Farrell just cited the word ‘yes’ comes to mind. And the fact that homeownership for households 65 and older has risen to 81% according to the Harvard Joint Center for Housing Studies, would further bolster the argument that now is the time for many to at least look into a reverse mortgage. But many may not. It’s complicated. Laurence Kotlikoff, a Boston University economics professor and expert on personal finance and retirement planning explains. “I went from not liking them to thinking they aren’t as bad as I thought”.

So why are reverse mortgages not going mainstream, as many of us in our industry have hoped? Kotlikoff puts it this way. “I looked more carefully with our software, and it got me back to not thinking favorably about reverse mortgages,

[read more]

It’s a complicated product to get your brain around. If you couldn’t come up with any other option to stay in the home, then use a reverse mortgage.” Farrell agrees.

Therefore in his upcoming book Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life, Kotilikoff suggests a number of alternatives to a reverse mortgage. A multigenerational home, renting out rooms on Airbnb, or a sales leaseback are just a few options he suggests.

What is a multigenerational home? The U.S Census Bureau defines a multigenerational home as a household that consists of more than two adult generations living under the same roof or grandparents living with grandchildren under the age of 25. Ironically, before the advent of FHA, government-backed financing, and suburban developments such an arrangement was the norm for millions of Americans.

A sales leaseback entails the homeowner selling their home to a family member or company, possibly pulling out some equity, and continuing living in it while making monthly rent payments to the buyer. Unlike a reverse mortgage, this strategy requires relinquishing ownership to another party. Renting a room or accessory dwelling unit on Airbnb sounds appealing but typically requires approval from local authorities, the ability to provide regular thorough housekeeping or to hire out cleans, a loss of privacy, and liability insurance.

Each of the alternatives to a reverse mortgage has its own wrinkles and complications. But let’s look again at why many see today’s reverse mortgage is complicated. One reason the Center for Retirement Research at Boston college cites is homeowners’ aversion to borrowing again, whether they have a low loan balance, and especially if the home is paid off free and clear.

The California Department of Real Estate’s brochure Reverse Mortgages. Is One Right for You says reverse mortgages are more complicated than conventional loans and that the consequences of the various plans and options offered in the loan are not always obvious? In fact, there are dozens of state and federal consumer publications that describe the loan as complicated.

While these are valid explanations for why reverse mortgages appear to be complicated, they ignore one obvious explanation that’s hiding in plain sight. It’s a counter-intuitive loan. As the name implies it flips the idea of a traditional mortgage on its head. That in itself is enough to give some pause, and that’s to be expected. But I would caution, what seems simple to reverse mortgage originators is often intimidating and ambiguous to others. Finding a way to bridge the homeowner’s basic understanding of their traditional mortgage works to how a reverse mortgage function differently is key.

What’s your opinion? Leave your comments below.

Stories mentioned in this article:
Next Avenue: Is This a Good Time to Get a Reverse Mortgage?
Centers for Retirement Research: Home Equity: Useful but Unused
California Departement of Real EstateReverse Mortgages. Is One Right for You?
Harvard Joint Center for Housing Studies: Housing America’s Older Adults