Across the globe, countries are facing an aging population that is unprepared to retire, and many governments are turning to reverse mortgages as an option to help fund longevity — the United States is no different.
With 10,000 baby boomers turning 65 each day for the foreseeable future, the United States needs to be a pioneer of the reverse mortgage product, and it has been.
If you look at the Canadian market, the industry is booming. HomeEquity Bank, the leading provider in Canada, saw volume grow 40% with a product that provides far less in proceeds, protections, and benefits.
In Australia, the government sees the reverse mortgage as part of the solution to help older Aussies retire and age in place comfortably. In China, which has the world’s fastest-aging population and a pension system hit by shortfalls, the government announced it will start allowing reverse mortgages for seniors nationwide.
Imagine if the United States government started looking at reverse mortgages as part of a policy strategy going forward for a population that hasn’t saved for retirement.
According to data from the Federal Reserve’s regular Survey of Consumer Finances, the average household retirement savings for those aged 64 to 75 is only $358,400, with the median being $126,000. When you factor in that Fidelity estimates the average retired couple aged 65 and over in 2018 may need approximately $280,000 saved — after tax — to cover healthcare expenses in retirement, it is obvious there is a major problem coming for the United States.
There will need to be a public policy solution to this problem, and it’s hard to argue that reverse mortgages won’t be part of the solution going forward, as the government will need to help retirees tap their own assets during retirement.
Based on these factors, the reverse mortgage industry in the United States is poised to grow. It’s not a matter of if; it’s only a matter of when.
-Thanks to John Yedinak
Here is a list of common phrases you may find in agreements that should cause you to pause and proceed with caution. Obviously the guarantee for a $75 DVD player that is economically easy to replace, isn’t as important as an extended used car warranty or a home service contract; but it's good to know your way around the fine print anyway.
1. FREE: Nothing is free. If you aren’t paying for the product, then you are the product. Your information is likely being sold to advertisers who will barrage you with online solicitations. Or maybe it's free now, but you are committing to pay later.
2. FREE TRAIL: It’s often accompanied by phrases like; we will not charge your credit card (until 30 days from now). This enters you into a game of WILL I REMEMBER TO CANCEL ON THE 29TH DAY? That’s a game the corporations usually win.
3. FOR 6 MONTHS: Along with the similar, “introductory price,” this is a version of the free trail game. Maybe $39 a month for cable TV sounds good to you in January, but if its $139 by August is that really a good deal? Will you remember to cancel and transfer to a new company by July?
4. AUTOMATICALLY RENEWS: The “walking dead” of the consumer universe; such clauses mean you keep paying even if you don’t realize it or want the service anymore. Sure, if you want the convenience, sign up. But beware if such an arrangement is tucked in the fine print.
5. FEES: We rarely compare late payment fees and other penalty charges when shopping, but we should. We all eventually screw up; but the cost of such a mistake shouldn’t be unreasonable.
6. OPT OUT: This phrase means companies can use your data however they wish unless you take a step (you opt out) to stop it. Most people just accept the default opt in setting. If you go with a product or service, opt out if you don’t want them to share or sell your information.
7 THIRD PARTY: This can mean you and your data are being sold to other companies for marketing purposes and you’ll ultimately receive unsolicited mail, Email, or other sales material. Many free offers are bait for third-party marketing tricks.
8. LEARNING MORE ABOUT YOUR INTERESTS: This phrase suggests the company is adding to what you are telling it with outside data in order to know more about you. It might use this to target you with precise advertising in the future.
9: RESTOCKING FEE: Sales people will talk you into taking a product home to try it and promise you can bring it back for a refund. But restocking fees can be high; like 15% for electronics.
10: EXTENDED WARRANTY: Consumers can find premiums for extended warranties snuck into monthly payments. The value of a warranty is debatable and you should know what the manufacturer guarantees with the item before deciding on the value of an extended warranty for you. However, you should always be fully informed of what the cost of an extended warranty is.
11. NOT COVERED: Many warranties are full of exclusions that can lead to disappointment. Wear and tear items like brake pads on a car for instance.
12. VOID THE WARRANTY: Sometimes, warranties became useless if consumers break terms that make them VOID. Such as getting an electronic item wet.
13. MANDATORY ARBITRATION: If a product injures you or you feel misled, you cannot sue in a court of law; you must submit to arbitration.
14: CLASS ACTION WAIVER: If you have been ripped off for only a small amount, it’s not practical to sue a company. Instead you might join a class action lawsuit, which combine your gripe with others. Many contracts force consumers to waive this right.
15. LIQUATED DAMAGES: With this phrase, the corporation attempts to cap potential damages you might be able to receive if you do manage to win a courtroom battle.
16: LIMITATIONS FOR SUIT: This may shorten your window for potential lawsuits. Check your terms and conditions to understand any abbreviation of time periods.
17: HOLD HARMLESS AND INDEMNIFY US: These words can give corporations the potential to force a consumer (or worker) to pay the company’s legal fees in the case of a lawsuit.
Remember, if it sounds too good to be true, it probably is.
Waiting as long as you can to take out a reverse mortgage may be one way to limit your chances of outliving the proceeds. The Consumer Financial Protection Bureau warns that younger retirees with longer life expectancies have a greater chance of using up all of their home equity with a reverse mortgage. This isn’t a problem if they are able to age in place—stay in their homes for life—but it is a problem if they want or need to move later on.
After selling the home and paying what they owe on the reverse mortgage, early age retirees might not have enough money left to move or to pay for ongoing living and medical expenses.
Future increases in interest rates could decrease how much you can borrow even though you are older. Jack M. Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, studied the issue. He found that a 62-year-old who took out a HECM reverse mortgage and waited until age 72 to start using his line of credit could increase their credit line by 17% by waiting those 10 years if interest rates stayed the same; versus waiting until age 72 to take the loan out to begin with. However if interest rates doubled, the line of credit increases would double as well. Thus it can actually make sense to be pro-active and take out a reverse mortgage line of credit plan as early as possible and then leave the line untouched for as long as possible to maximize its growth potential.
If you’ve already taken out a reverse mortgage and think you may be at risk of running out of proceeds, call us to discuss changing your payment plan. As long as you didn’t go the fixed-rate, one-time-lump-sum route, you can change your payment plan—provided you can stay within your loan’s principal limit. The big question is whether you’ve already reached or are close to reaching the principal limit. Changing your payment plan is much simpler than refinancing and requires only a $20 administrative fee. However sometimes refinancing will significantly increase the available funds. Let's find out together and do a free comparative analysis for you.
Marc has 36 years in financial services and 6 years in teaching.
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