I haven’t seen any statistics on the precise reasons for borrowers obtaining reverse mortgages. Anecdotally, though, it seems a sizable portion are obtaining them for no “real” financial need, and are instead using them merely to maintain existing lifestyles. It would be one thing if that translated into moderate subsistence, but quite another if it meant affluence.
What do I mean by affluence? To be honest, I’m not exactly sure, because the term means different things to different people. For some, it conjures up images of sumptuous luxury, while for others, it brings to mind certain middle-class comforts. For the purposes of our discussion, it’s probably better to think of the concept in relative terms. Let’s define it as a lifestyle that is extravagant relative to one’s financial condition.
Using the proceeds of a reverse mortgage to maintain or even improve one’s affluent lifestyle is an implicit acknowledgement that one’s lifestyle is unsustainable and requires “outside” sources of cash to support. Remember that a reverse mortgage is ultimately just a loan. It avoids this label because it isn’t usually repaid by the borrower, and is couched in clever terminology such as monetization. Despite being different from a loan in form, however, it is the same in principle. It accumulates interest, is secured by collateral (one’s home). and must be re-paid. While the terms of a reverse mortgage are certainly better than a credit card loan, the idea behind both is the same. Think about it this way: would you ever borrow $50K (or more!) using your credit card, simply so that you could continue to make fancy purchases and nice vacations. I suspect the answer is probably not.
That’s not to say that affluence is a vice, or something that should be shunned. On the contrary, I think that those who worked their entire lives and paid into the system are entitled to enjoy a comfortable retirement. Still, there is no free lunch, and borrowed affluence is irresponsible. Those who desire such a lifestyle should accept the trade-offs and compensate for their spending by making cutbacks in other places, namely by downsizing into a smaller house. This solution could free up $100K (or more!) in cash, depending on the difference in price between your old and new home, and best of all, leave you debt-free. Maintaining your current lifestyle AND continuing to live in the same home when you can’t afford to do so naturally is naive. If you like your house, then you should consider spending less on your lifestyle. If you cherish your lifestyle, consider moving into a smaller house.
Defenders of this practice would probably argue that they are simply “monetizing” what is rightfully theirs, and that they shouldn’t have to economize when they are sitting on a pile of potential cash. This mindset blithely assumes that one will be healthy for as long as the reverse mortgage ATM has money in it and will die shortly thereafter. The same applies to he who obtains a reverse mortgage in order to compensate for retirement account (i.e. stock market) losses under the assumption that it will inevitably rebound. This ignores the possibilities that one will spend all of the proceeds from the reverse mortgage and/or that one will live longer than expected and/or that one’s health could suffer. If any (or all) of these occurrences should transpire, it would necessitate sudden and radical changes in your way of life. When you look at it this way, taking out a reverse mortgage to fund affluence looks misguided at best and foolish at worst.
In short, think twice before obtaining a reverse mortgage so that you can continue to live beyond your means. While you may get lucky and “beat the system,” the law of averages means that you probably won’t, and your Day of Reckoning will only be delayed.
3 Responses to “Think Twice about Obtaining a Reverse Mortgage for Affluence”
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March 11th, 2010 at 9:42 pm
Before commenting on this article I want to state for the record that I am an mortgage professional with 26 years experience, 8 of which have been providing reverse mortgages.
During these 8 years I have worked with hundreds of people to obtain a reverse mortgage and I cannot recall a single borrower who applied for one to maintain or achieve “affluence”, as defined by the article’s author. So rest assured, at least based on my experience, people are not using reverse mortgages for this purpose.
What people are using it for is to help maintain or recover their standard of living, that for most reverse mortgage recipients is anything but affluent. In my experience people typically turn to reverse mortgages reluctantly and often as a last resort. And I have had many avoid a reverse mortgage even when it was obviously to their benefit and the only way to address financial issues/problems. I have also witnessed people do as the author suggests and downsize or make lifestyle sacrifices that negated the need for a reverse mortgage.
I’m not sure what the author’s background is, but I find it interesting that they admit to not having seen any statistics on why people seek reverse mortgages but then suggest “a sizable portion are obtaining them for no “real” financial need, and are instead using them merely to maintain existing lifestyles”. Based on my experience the author’s presumption couldn’t be further from the truth and they frankly could have saved themself and the readers some time and not bothered with the article at all.
I would like to urge the author to give senior homeowners a little more credit for intelligence because they are not doing reverse mortgages, at least in any detectible numbers, for the frivolous purpose of trying to obtain affluence or live beyond their means.
April 18th, 2010 at 11:51 pm
Michael-
Thanks for your comment! I apologize if I sounded presumptuous and exagerative. The point that I was trying to make with this post (and is a general theme on the blog, for that matter) is that reverse mortgages aren’t appropriate for a sizable portion of borrowers that obtain them. Of course, I would like to believe that the majority of borrowers obtain reverse mortgages for genuine financial need, and if I offended such borrowers, I apologize, for this post clearly wasn’t directed at them.
We can disagree over the figures (whether it’s 10% or 50%, frankly, I’m not sure as I haven’t seen any data), but my point is that those past the age of retirement should be inherently conservative with their spending, especially if they can’t afford to finance such spending with savings alone.
Life is full of tradeoffs, and those for whom “affluence” is important should consider downsizing – rather than borrowing – in order to support that affluence.
-Adam
April 20th, 2010 at 7:22 am
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