I am a big fan of CNBC. But when it comes to financial advice the talking heads on CNBC are often more interested in their own ratings than in giving quality direction. Case in point is Suze Orman. Don’t get me wrong, I think she is colorful, and some of her advice is worth following. However, there are times when Suze is dead wrong, and if you ask me, her advice on reverse mortgages is one of those instances.
Today’s retirees have been faces with some of the deepest economic crises this country has seen since the Great Depression. If you can remember, there was the savings and loan crisis in the late-80’s and early-90’s. In Connecticut alone, it appeared that almost every bank in the state closed within one week in 1991. Then we had the dot-com bubble, which was particularly mean to almost everyone’s 401k. Next up was the housing bubble, which saw prices run up to historic levels only to come violently crashing back to earth. This precipitated the Great Recession, and while the economy has for the most part recovered, the recovery has been uneven at best.
For seniors who have had to withstand 25-years’ worth of economic volatility has left them with little breathing room. As such, I can understand when soon-to-be retirees look at their savings and realize they don’t have enough money saved up. In some cases, the only asset they have which is worth anything is their home.
The only challenge is that they probably have a mortgage outstanding. Even if the interest rates are not too bad, they are struggling month-after-month to make sure they remain current. So, the opportunity to save thousands every month on mortgage payments can often be welcome relief.
Now this is not to say that a reverse mortgage is a panacea. The truth is that it is not for everyone, but financial planners and savvy investors understand that getting a reverse mortgage is a retirement tool which shouldn’t be dismissed.
Especially since the government revised the rules for these mortgages to make sure that lenders were checking a borrower’s ability taxes, insurance, and utilities on the property in question. You see this was not always the case and the new rules have helped to ensure that unscrupulous lenders are not preying on seniors. This is a big plus and it helps keep seniors in their homes.
Another thing which everyone needs to know about reverse mortgages is that these government-insured loans are non-recourse loans. This means that even though the interest on the loan will accrue over the life of the loan, the bank cannot go after you, your estate or your heirs in cases where the accrued interest plus the principal is more than value of the house.
However, this does not mean that all reverse mortgages are non-recourse loans. You need to check the fine print with a trusted adviser when getting your loan. This is especially true when you are getting a jumbo loan or any other version of proprietary reverse mortgage as they are not insured by the government and may be subject to different rules.
As you can see, the devil is in the details. But this is true with almost everything in life and to a certain extent, Orman’s advice on reverse mortgages is more histrionics than solid financial advice.
Again, I am not saying that reverse mortgages are for everyone. But there are legitimate instances when these loans should be considered, even when only one of the spouses is over the age of 62. But to blindly label reverse mortgages as a ‘last-resort emergency fund in retirement’ does not do this tool justice.
In some cases, a reverse mortgage might make sense as an alternative to borrowing against one’s 401k account. For example, you have just had a major medical incident and you need the extra money, or maybe the housing prices in your area are at or near highs, or even as an alternative to purchase a new home in retirement.