Reverse mortgages are an “overhyped” financial tool, and can sometimes lead to an either unintended or even detrimental impact on a client’s finances, according to an article authored by a Certified Financial Planner (CFP).
In an effort to compile a list of financial strategies for clients that are “overhyped” – defined in this instance as strategies that are not likely to have a big impact, can’t be employed by many clients, or are likely to have a negative effect – Florida-area financial advisor Daniel B. Moisand of Moisand Fitzgerald Tamayo Financial Planning and Wealth Management says that reverse mortgages fall into the “overhyped” category, according to a new article at Financial Advisor Magazine.
While reverse mortgages are “much improved” compared with the state of the products in previous years, they make the cut on the “overhyped” list, Moisand says, because greater understanding about what a reverse mortgage entails often leads to disenchantment on the part of a client.
“There are a variety of structures and therefore a variety of potential uses but they make my list because there are few clients that are keen on the idea once they understand how reverse mortgages work,” Moisand writes. “When clients are open to the idea, there are usually ways to address the problems reverse mortgages are touted to fix that are more palatable to clients.”
The crux of the issue related to reverse mortgages is that despite the impression given by the materials that advertise them, they constitute a loan that must be repaid, Moisand says. Still, the ability for borrowers to not have to make regular payments and the nonrecourse nature of the loan can be “useful,” but there is a price that comes with that flexibility.
“The price for that payment flexibility is spending home equity at a faster rate than a lower interest alternative with servicing payments,” he says.
Still, Moisand says that the employment of a reverse mortgage can be effective, and he recommends that financial planners read the works of Dr. Wade Pfau to see an effective illustration concerning how they can be used to further secure the cash flow for a retiree. The responsibility for financial planners to present viable options also can and should extend to reverse mortgages, he says.
“Reverse mortgages deserve consideration but be prepared,” he says. “When you bring up the topic of reverse mortgages, many clients are not going to react favorably. After a lifetime of working to have a paid-off home, they don’t want to borrow against their equity, especially at the higher costs reverse mortgages incur.”
Many clients will prefer looking at alternative ways to address issues related to cash flow because of the upfront cost, and the presence of alternative options to a reverse mortgage makes them a harder sell, he says.
“At least with our clientele, there is almost always an alternative to borrowing against the client’s home to address those issues.”
Read the full piece at FA Magazine.
