Be wary of reverse mortgages by Luke Davis

Recently, I took a day off from work and decided to catch up on some daytime TV. It was interesting to me how different the commercials are during the day, and how targeted they are to stay-at-home moms, the unemployed, and seniors. Of particular note to me was how much bad financial advice you receive watching CNN or Fox News in the middle of the day. It seemed like every other commercial was using some sort of fear tactic to sell different types of financial product such as gold coins, fixed annuities, payday loans or, the topic of this article, reverse mortgages.

What really caught my attention in these commercials were the famous people they use as spokespeople. In that one afternoon, I saw, both “Magnum PI” and “The Fonz” hocking reverse mortgages. Clearly the advertisers know the demographics of the people they are selling to, and use celebrities from their era to market themselves. After doing a little research I discovered besides Tom Selleck and Henry Winkler, Fred Thompson, Robert Wagner and Jerry Orbach have all recently promoted reverse mortgages as well.

For those of you who don’t know, reverse mortgages work exactly like they sound. The homeowner basically takes a loan from the bank using the equity in the house as collateral. The bank then typically distributes the proceeds of this loan to the homeowner in the form of monthly payments.  When the borrower either dies, or no longer lives in the home, the total balance of the loan becomes due.

The terms of these loans are often intentionally confusing and complex. In fact, a recent study by the Consumer Financial Protection Bureau found that those selling reverse mortgages use deceptive practices to create false impressions about how the loans work or the financial implications that can result from signing up for one.1

That’s why these companies use celebrity endorsers to sell their product. Since the reverse mortgage is generally a bad financial product, the companies selling them rely on the built in trust many seniors have in these actors to transfer over to the companies they represent. This tactic isn’t exclusive to reverse mortgages of course, famous people like Alex Trebek, Betty White and Ed McMahon were all selling whole life insurance policies as far back as the 80’s and 90’s.

But what I especially don’t like about the pitch men for reverse mortgages, is how deceptive they are in their explanation of what they are selling. For example, Tom Selleck states in his 30 second ad that reverse mortgages sound too good to be true but they aren’t. He explains these products allow you to get cash out of your house for bills, traveling, or whatever you want, without having to make a single mortgage payment, and while still continuing to own your home.

The reason it sounds too good to be true is because he’s not telling you the whole story.  He neglects to tell you that reverse mortgages charge very high upfront closing costs, and interest rates that can be as high as double what other home equity loans would be. The biggest misconception these ads spread however, is that with a reverse mortgage you’ll always get to stay in your house. In reality, it is common for people to lose their homes after the reverse mortgage payments dry up and property taxes or HOA fees continue to be due. As a result of these unpaid liabilities many are forced out of the home, and the balance of the mortgage becomes due. In these circumstances the bank often takes possession of the house.

My goal in writing this is not to convince you that reverse mortgages are a bad idea 100% of the time. Doing that would cause me to be just as misleading as the companies I am railing against. There are some circumstances, where as a last resort, it might make sense for some cash strapped seniors to take one out. But, before you do so, you should contact a financial advisor. These decisions are simply too important to make without a full understanding of what you are signing up for. If you would like more information about reverse mortgages and if they make sense for you, contact us at info@stewcap.com.

Past performance is no guarantee of future results. Advice is intended to be general in nature.

1 https://www.consumerfinance.gov/about-us/newsroom/cfpb-study-finds-reverse-mortgage-advertisements-can-create-false-impressions/

August 22nd, 2018|Categories: Personal Finances, Retirement, Uncategorized|