While there are lots of errors you can make in getting a reverse mortgage, one stands out among the worst: that is deciding to wait until you are older and have greater financial needs before setting up a reverse mortgage. I’ve heard it all too often, “We can manage a few more years before the money runs out. Then we will call you.”
Now, don’t get me wrong, this is different from simply deciding it is the wrong step; that can be a valid conclusion for many reasons. But to put off until later, even though it is readily apparent that you are at risk of out-living your money, is often a tragic error.
Too many people wait until later, only to find what would have worked before won’t work anymore. While it is prudent not to rush into such an important financial step, but simply delaying the decision because you don’t want to face the facts rarely pays positive dividends. Rates, programs, and home values can change. Also, and just as importantly, your circumstances can change.
One of the toughest parts of my job is the call from someone I talked with 5 years ago, when getting a reverse mortgage would have been simple, inexpensive, and a fairly obvious step, yet they decided to delay. Now, the situation is different. They have taken on extra debt, like an equity line or credit cards, the payments for which have become burdensome. This can make the reverse mortgage more expensive or impossible. Even if nothing has changed on the clients’ end, lending guidelines are becoming more restrictive and the application process, more complicated.
Just the other day, I had a person contact me saying, “We are now ready to go, Scott. It’s been 5 years, so we are older and should get more money. Since we talked last we got a mortgage that we will need to pay off.” The problem is the initial amount available from federally insured Home Equity Conversion Mortgages (HECM) went down by 15% in October 2014. When I ran the numbers, there wasn’t enough to pay off the current mortgage. “What am I going to do? We missed the last payment because the car needed work. I was counting on getting a reverse mortgage.”
For a lot of people, it is like the way I tried to childproof my house. By the time I made adjustments, my daughter had grown and changed into a new person. What she couldn’t reach yesterday, she could grasp today. I was always one step behind her. (Still am, too.)
The other problem with waiting until you have a problem is that ‘crisis management’ is an oxymoron. Once it is a crisis, it can’t be managed! Too often, I am meeting with people who have been using credit cards to buy food, medicine, and fuel. Now, they can’t make the increased monthly payments and the penalties have made the debt impossible to keep up with. What they want to do is use the reverse mortgage to dig them out of the hole they are in. Unfortunately, at that point, the most it can do is often to get them out of the hole, but leave them on the edge, because all the money the HECM provided was used to pay off past debts.
Then we aren’t solving problems, we are buying time. The wolf may not be at the front door, but he is down at the end of the driveway, waiting to come back again.
So, waiting too long to apply can be a big mistake. How can you avoid that error? Look beyond your present situation to where you might be in 5 or 10 years. What if one of you dies? How will the surviving spouse (or partner) do? Do you have enough financial reserves to handle upcoming expenses? The most important question of all is what are your real alternatives to getting a reverse mortgage? Where is the money going come from when you have an emergency?
If the answer is that the money isn’t going to be coming, it is time to sit down and be real about whether you are delaying your choice for a valid reason or are just delaying facing the choices you really have.
~~~ Have you struggled with reverse mortgages or other tough choices in your retirement? Please share them by commenting on this blog.