Run Away if (when) you hear them!
If you hear someone make a blanket statement about a specific product or service in the financial space like X is Always a bad idea for everyone, then run away as fast as you can.
There is no one size fits all, just like there is no one size fits none.
More likely any given product (or service) fits very well in some circumstances and situations and not so well in others.
The financial industry is highly regulated and has many rules and oversights on the products and services that are allowed by the state and federal regulators.
If a particular product or service was bad for everybody and every situation, then it wouldn't be allowed to exist.
Sometimes the sales people selling it, expand beyond those specific cases, but that is a whole different ball of wax for a different discussion.
The full facts and specific differences of a particular family need to be factored in to any and all decisions.
Here’s a specific client story:
I have a client that is moving and we are looking into how to best accomplish her buying her new home.
She told me that if possible she wants to eliminate her mortgage payment.
The new home will require about $100,000 above the equity in her current home. Somehow she needs to come up with an extra $100,000 and there are a number of different options for that to happen:
- Traditional mortgage
- Reverse mortgage
- Other current assets
- Some combination of the above, or another solution altogether
Each one has plusses and minuses and could be a good (or bad) fit for my client for the various different specifics of her situation which I’ll cover in a second.
Her realtor said Reverse Mortgages are bad. Definitely don't get one.
The problem is that Realtor had a scenario in her past where a woman had a reverse mortgage on her home and when she passed away, that is when the kids found out that their mom had been living off of the equity in her home and had “spent there inheritance”. They thought they were entitled to her equity and were upset that there wasn't any because mom had been living off of it.
That case is from the past and I don’t have further details, but presumably if there had been other assets that woman could have been living off of while she was still alive, then she would have done so and those would have been spent instead. That would have preserved the equity in the house as a legacy for her kids.
Let's just remember that she had to live off of something. If there weren’t sufficient additional assets in her estate, then all that was left for her to spend would have been the equity in her home.
This was a lack of family communication with her kids not knowing what mom was doing until after she passed, plus an entitlement issue with the kids expecting an inheritance, not a problem with the reverse mortgage as a product itself.
My client doesn’t have kids, so she is in a significantly different situation than the Realtor’s story. She is also single and living on a fixed income, so a monthly payment from a traditional mortgage would be in place of something else she could spend that roughly $900 a month on.
A traditional mortgage requires a monthly mortgage payment, and current interest rates are relatively high when compared to the last couple of decades.
And worse than that, with a traditional mortgage, in the first several years, the payments are virtually all interest, so she wouldn’t even be building up much equity in the house beyond appreciation, which she would get no matter what.
A reverse mortgage on the other hand can be structured to have no monthly payment and enable those funds to be used instead for extras beyond her current living expenses and potentially some bucket list items.
If my client were to instead use her current assets to enable her to pay cash and avoid a mortgage all together, which let's not forget is one of her goals, that would virtually eliminate her other assets and leave little for an emergency fund
She would be putting all her eggs in one basket, and that would not give her much room for any unexpected circumstances, not to mention all her assets will then be equity that is just sitting in her house not able to be used for anything else.
Chances are when you hear a blanket statement, the person making it has a financial interest in you believing whatever they are pushing as a good (or bad) idea. Or in the case of the Realtor, they have a specific story of where it didn't work out for someone - a single case scenario, where may they are viewing the facts from a narrow, skewed, or distorted perspective.
Every product or service out there has a purpose and situations where it would be a great fit, and others where it wouldn’t fit nearly as well, or not at all.
Is a given product or service right for you? It depends on what you are looking to accomplish in the future as well as your current situation and circumstances.
Same thing goes for a product or service that is touted as a great idea for everyone - best thing since sliced bread.
There is no such magic bullet even though there are great salespeople out there that are being paid to make you believe that there is.