Are Reverse Mortgages Beneficial or Risky?

A reverse mortgage sounds like a great idea. One website touts, “You can turn the value of your home into cash without having to sell the property, move out of it, or repay a loan every month!” If this sounds too good to be true, that’s because it might be. It is important to consider if the benefits outweigh the risks.

Reverse mortgages are on the rise and this trend seems likely to continue. As the percentage of the older adult population continues to increase, the lure of a reverse mortgage may become tempting for many. As you can see in the graphic below this trend has escalated in recent years and projections indicate in the next 15 years more than 25% of our population will be over the age of 60.

How a Reverse Mortgage Works – Simplified

Generally, you must be 62 years of age and occupy the home as your principal residence in order to qualify for a reverse mortgage. You must own your home outright or have a nominal mortgage balance that you can pay off with proceeds from the loan. In a traditional loan you borrow money and pay principal and interest over time to a lender to purchase a home. Conversely, a reverse mortgage pays off any existing mortgage balance and pays you a fixed monthly amount based on the equity available. In most cases with an existing mortgage they only pay the mortgage for you.

Let’s say your home is worth $250,000 and has a mortgage balance of $25,000. The reverse mortgage would pay off the $25,000 and divide the remaining equity into monthly payments of $1,000. So instead of a loan balance getting smaller like in a traditional loan, the loan balance gets larger. If you ever wanted to move or sell your home you would have to pay back the original $25,000 plus the monthly payments received plus accrued interest. The same is true if you were to die and your family wanted to keep the house. Below is a diagram illustrating the differences between a traditional mortgage and a reverse mortgage.

The only federally insured reverse mortgage loans are Home Equity Conversion Mortgages (HECMs) and to qualify for these loans your house must be a single-family home or a two- to four-unit property that you own and occupy. There are two other types of loans not federally insured, Single-Purpose Reverse Mortgage and Proprietary Reverse Mortgages, but they can have significant restrictions and much higher costs.

There are five essential questions to ask yourself before you consider a reverse mortgage:
1. Do I NEED a reverse mortgage?
2. Can I AFFORD a reverse mortgage?
3. Can I afford to start using up my EQUITY now?
4. Do I have less costly OPTIONS?
5. Do I fully UNDERSTAND how these loans work?

When we say NEED, we mean, “Will your standard of living be greatly diminished if you are unable to obtain a reverse mortgage?” Reverse mortgages are not the way to finance your dream vacation around the world or invest in the “Next Big Thing.” Reverse mortgages can be expensive and frequently have a lot of small print and special limitations. Get your glasses out and READ EVERYTHING!! If you have exhausted all of your other financial resources a reverse mortgage could be a way for you to stay in your home and have additional income.

You ask, “Why do we need to be able to AFFORD a reverse mortgage?” These loans can be very expensive and the amount you owe grows every month. The younger you are when you take out a reverse mortgage, the more the compound interest will grow. The up-front cost of these loans can make moving prohibitive if you needed to move after a few years. Depending on how the reverse mortgage is structured you may need to have enough funds available to pay off the reverse mortgage if one of you die.

The more EQUITY you use now, the less you will have later when you need it. This is especially important for future medical emergencies, healthcare needs, increases in living expenses or if your income cannot keep pace with inflation. The equity in your house should be reserved for financial emergencies, moving to assisted living or repairs and modifications to your home.

Look at your OPTIONS before deciding on a reverse mortgage. Just about any option you could imagine costs less than a reverse mortgage. If you can afford a home equity line-of-credit this is a much better solution. Utilize resources for older adults that can provide special financing for home repairs, property taxes and healthcare expenses. Have you ever considered downsizing? Moving into a smaller home sooner rather than later has been proven to increase older adults’ quality of life, or better yet, make your vacation home permanent.

UNDERSTANDING how these loans work and how they are different from traditional mortgages is the most important step in deciding if a reverse mortgage is right for you. If you enter into a reverse mortgage, in all likelihood there will be little equity in your home to leave you children after your death.

While a reverse mortgage could be a monthly source of income for you it is important to fully understand all of the risks associated with these types of mortgages. You can contact a HECM Counselor through the National Clearinghouse for Long-Term Care Needs, National Council on Aging or the Department of Housing and Urban Development to answer questions and explore additional options.

If you would like to contact the author of this article, contact Monica Tulley at 404.892.7967 or mtulley@rollinsfinancial.com

More Information:
National Clearinghouse for Long-term Care Needs
National Council on Aging
Department of Housing and Urban Development - Reverse Mortgages

In Case You Missed It....

We are excited to announce that beginning July 1, 2014, the accounting side of our Rollins' family, Rollins & Associates, P.C. will become Rollins & Van Lear, P.C.
 
Some of you may be wondering, "Where is Joe going?", or "Who is Van Lear?". Well for starters, Joe Rollins is NOT going anywhere. Those of you who truly know him are well aware that he will not be retiring any time soon - we're pretty sure that years and years from now we'll still have to pry the little blue Sharpie out of his lifeless fingers!
 
And for those of you who aren't sure who "Van Lear" is, or haven't had the privilege of working directly with her, you can rest assured she knows who you are and has helped you in one way or another at some point over the years. The "Van Lear" comes from Rollins & Associates' very own Danielle Van Lear (Schultz).

 

Danielle Van Lear, CPA/PFS has worked for Rollins & Associates, P.C. for over 10 years and has been the backbone of the "& Associates" part of the name for countless tax seasons. For those of you that know Danielle like we do, it should come as no surprise that Joe has decided to make her a partner in his accounting firm. As we mentioned in the announcements that were mailed out, "we believe in giving credit where credit is due," and that is exactly what we're doing. So congratulations Danielle - we're proud of you and you deserve it!
 

As always, feel free to reach out to us with any questions and thank you for allowing us the opportunity to serve you; we look forward to doing so for many more years to come!

Sell in May and Go Away...Wrong

From the Desk of Joe Rollins

I would like to discuss why it would be a bad idea for you to sell now and go away for the rest of summer. The talk on Wall Street for many years is that most of the money is made in the period between October and the following May; the thought is that by avoiding the volatility and losses of the summer, you will actually end up much better than remaining invested June through September. I believe this year we might have an argument to stay fully invested for the summer, which I hope to explain later in this post.

If you followed the maxim of "sell in May and go away", you would have missed out on what ended up being quite a good month. For May, the Standard & Poor's 500 was up 2.3%, and up a total of 5.0% for the first five months of the year. While certainly not the fiery results of 2013, still quite good. The Dow Jones Industrial Average was up 1.1% for the month of May and sits nicely for the year, up 1.8% The NASDAQ Composite had an excellent month, up 3.2%, but has suffered more losses than the other major indices putting it at 2.0% for the year.

The Russell 2000 (small cap) index continues to struggle. While up 0.8% for the month of May, it is still down 2.0% for 2014. The Barclay's Aggregate Bond Index was up 1.1% for the month of May and sits even higher at 3.8% for all of 2014. All in all, May was a great month with all major indices and even bonds posting higher returns.

May was a very good month for the Rollins household as well - there was the always exciting end of the school year/beginning of summer, and both of my children celebrated their birthdays. Joshua turned 19 this May and his little sister Ava turned 3. Despite writing some of the most interesting and provocative posts known in the financial world, virtually the only blogs anyone ever comments on are the ones that include pictures of my children. In fact, I am often criticized because there is not a picture of them in every blog I write. So I thought I would briefly divert your attention from the financial news with these pictures (Josh & Ava attending a recent Braves game, another ball to add to Ava's collection, and me & Ava celebrating her BIG 3).

And now back to it...We continue to see high volatility in the underlying small-cap stocks, and to a lesser degree, the NASDAQ Composite stocks. Since the middle of March, these indexes have been punished pretty much on a daily basis. As I mentioned in my last posting, I do not believe for a second that there is anything underlying fundamentally negative about small cap or over-the-counter stocks. I think this all relates to a normal rotation with professional trades switching from one segment of the market to another.

Seemingly during this time frame, small cap stocks have suffered since there has been a rotation out of the smaller technology stocks and more importantly the biotechnology stocks into either bonds or large cap stocks. Given the potential for profits in these small cap stocks, I am a long way from wanting to give up our positions. I think we will ride them out for a few more months and see exactly what happens.

It is also interesting to note the economic news during the month. The original forecast of the GDP for the first quarter of 2014 came in at a 0.1% gain - that is about as close to breaking even as you can actually get. However, just last week they announced a slight revision of their GDP calculation to recast the first quarter GDP to -1.0% growth. It was astonishing to see the articles written by traditional newspapers regarding this negative GDP growth for the quarter. There were even publications that were thoroughly examining the definition of a recession and back-to-back negative GDP growth.

I wish people would exercise some common sense when it comes to basic economic reasoning. There is virtually no one skilled in the science of economics that believes the country is in a recession. In fact, most economists are calling for the GDP growth of close to 3.0% for all of 2014. I certainly see GDP growth in the quarter we are currently in at 2.5% at trending higher. For anyone to assert the U.S. economy is falling into recession clearly is not viewing the economic conditions correctly.

Actually, I would be somewhat shocked if the GDP for the second quarter of 2014 was not in the 2.5% range. It is inconceivable to me that with car sales up drastically, home construction on the upswing, and manufacturing operating at near full capacity, that we could not reach that 2.5% level. Additionally, consumer confidence and consumer spending continues trending higher, which could be a sign of an even higher GDP for the rest of the year. As any student of basic economics knows, if economic activity grows, clearly profits will rise, leading to higher financial markets.

As for the value of the market pricing today, it is fairly clear to me that with little moving in the market for 2014, the market is essentially priced the same as it was at the end of 2013, except now the earnings are higher. As I mentioned in my previous post, the three components - higher earnings, better economic activity and low interest rates - are all intact. Therefore, no change is warranted to our basic investment philosophy at this time.

When it comes to interest rates, if you have not refinanced your mortgage, you are missing out on a fabulous opportunity. Interest rates are currently at some of the lowest levels of all time. This may be the last time you can refinance at such low rates. Just in the last week, I have seen the ten-year treasury move from 2.4% to 2.6%. I think it is finally starting to loosen up and the bond market is realizing that economic activity is on the uptrend. While certainly higher interest rates do not look good for the bond market, they clearly support a higher stock market.

As we move forward into the summer, it would not surprise me to see the market move higher. Given the extreme volatility we have noticed in 2014, it would not even surprise me to see the market jump up 5% or 6% in one month alone. While withstanding all the negative publicity we are reading, I personally still think the trend in the markets bode well for a low double digit return for 2014.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins