Bad advice is always free but costly

reverse mortgage terminology

Common misleading statements about the HECM

Yesterday I turned on our local AM station and was aghast at what I heard. “So you both make about $150,000 a year and your mortgage interest payments would be about $16,000 a year. With your combined income that would place you in a 40% tax bracket so your interest deductions would save you about $7,000 each year in taxes”. I was shocked. Here’s a ‘financial ‘expert’ with his own radio show misleading one of his faithful listeners who phoned in. The mistake is sadly a common one- oversimplification. A more accurate answer would have considered that caller’s standard deduction of $24,000 a year would make deducting home interest payments highly unlikely- unless they already had other significant itemized deductions.

This radio segment made me reflect upon some of the bad advice that I’ve heard given over by well-meaning originators over the years.

Often salespeople love to use simple anecdotes and solutions. No surprise as they often help close the sale. Here are just a few of the simple yet misleading explanations that have been touted for reverse mortgages:

  • It generates monthly income
  • It’s tax-free income
  • You can live in your home for the rest of your life
  • You can’t outlive the loan
  • Your Lifetime Expectancy Set Aside will pay your property charges until you die
  • The line of credit grows forever with no limitations
  • You only need to have enough equity to qualify
  • A HECM is a way to leverage your wealth

While the radio host failed to mention the impact higher standard deductions have on mortgage interest deductions, HECM originators must ensure they are providing accurate information in a meaningful context. To know the context you must do some fact-finding about their finances. Speaking of taxes, if your potential borrower is currently deducting mortgage interest payments, you had best inform them that they would no longer have that deduction with a reverse mortgage- that is until the interest is actually paid.

Regardless of our experience, it is always wise to reexamine the words we use when communicating with older homeowners, family members, and financial professionals. Are they accurate, confusing, or misleading? Will they create potential headaches in the future for the homeowner or our company? The answer truly depends upon the accuracy and clarity of your communications.

What misleading explanations of reverse mortgages are you seeing? Leave your comments below.