A very candid commentary on reverse mortgages appeared recently in , the Dow-Jones online personal finance ezine. Writer Thomas Kostigen makes clear his view of reverse mortgages:
“They are notoriously bad deals for people in all but the soft sense: they get to live in their homes for the rest of their lives….But the poignancy of people’s circumstances is trumping sound financial planning. A quick thumbnail calculation shows you could gain more by selling your home, moving into a rental or less expensive house — and putting your money in ultra-safe Treasury bills. This would eclipse any reverse mortgage calculation.”
He’s basically right, too. In a strict economic sense, most people would be far better off selling the homestead, wisely investing the proceeds, and living out their lives in a smaller home or rental unit. They would avoid stiff loan origination fees, insurance premiums, and they would have immediate access to 100% of their home’s equity.
But the strict economic analysis falls short on two counts:
- First, seniors’ desire to stay in their homes may be a “soft” variable in a purely rational analysis, but it’s a hard reality that cannot be so easily dismissed. Many surveys have clearly shown that for most seniors, the desire to remain in their home is remarkably strong. Evidence is readily found throughout the nation’s neighborhoods – seniors continuing to live in oversized, deteriorating homes despite the fact they might be better off selling.
- Second, the notion of selling the home and investing the proceeds is a strategy for self-insuring against a longer than expected life. If done reasonably well, you may certainly come out ahead – just as a prudent employee may come out ahead with a defined contribution pension in lieu of a company-guaranteed defined benefit pension. And, yes, the option of a purchased life-annuity is always there. But for many people, the comfort of a U.S. Government guarantee that you’ll never outlive your resources – a feature unique to the home equity conversion mortgage (HECM) program – will trump hard-nosed economic analyses everytime.
So, are reverse mortgages just plain wrong? A financing tool that perhaps shouldn’t even exist?
I don’t think so. Reverse mortgages fill a niche. But they are extremely costly loans that should be considered only after all other options – including regular home equity financing, selling and moving, intra-family financing – have been thoroughly explored.