Reverse Mortgages With Annuities ? A Bad Combination?

For the most part yes they are a bad combination. I personally have been in the insurance and mortgage business since 1979, while annuities and reverse mortgages are great products in and of themselves, the combination can be detrimental.

The problem comes when a Mortgage Broker/Insurance Representative tries to enhance their commission by helping a client get a reverse mortgage and then directing all of the money into a deferred annuity. Generally the reverse mortgage is a tool that is utilized to free up cash, a deferred annuity limits the access to that cash thereby hindering the very reason that a person has done a reverse mortgage.

A deferred annuity is a great vehicle to utilize if you want to protect money that you have, but it would almost never makes sense to borrow money to put into a deferred annuity, if you did, you would be paying interest on the money that you had put into the deferred annuity.

The annuity return would have to be greater than the interest that you are paying on your mortgage. With a reverse mortgage there is no interest currently due, but it is in fact accumulating against the equity in the home.

The other issue with a Home Equity Conversion Mortgage is that you have an option of leaving the money in a line of credit, that line of credit has a growth rate factor to it. So in essence, if you are going to put the money into an annuity, you would have to beat the credit line growth rate, and the interest earning against you on the borrowed money.

For example, if interest rates are currently at 5%. Then your credit line growth rate would be 5% and the interest charged against money you have taken from your reverse mortgage would be 5%.

So you?re annuity would have to beat 10%, in order to be a better deal. Money left in the line of credit would be growing at 5%, so you would lose that and you would have 5% earning against you on the money that you had borrowed.

This is very confusing for most people, and in fact, most insurance representatives don?t understand that they are really doing a disservice to the senior citizen that takes out a HECM, and then puts the money into an annuity. I think to simplify the issue it just never makes sense to borrow money and then try to invest it into something else that might give you a higher return, unless you understand the risks involved.

Most insurance agents believe that indexed annuities will provide a higher rate of return than the money costs the borrower to borrow. But after over 30 years in the insurance business and being very well educated on annuities I disagree, indexed annuities might earn 6% or 7% on average. But as I pointed out in my earlier example you?d have to earn 10% for it to be a better deal.

Not to single out annuities, I want to point out that it would not make sense to borrow the money and put it into a bank account or the stock market either. The stock market has risk, and if you?re borrowing money from your home you should probably not be putting that money at risk, and a savings account is going to perform worse than an annuity.

So what should you do with the money from a reverse mortgage? That really depends on what it is you?re trying to accomplish. If you don?t need the money right now and you?re just getting the reverse mortgage to protect yourself for any future cash needs then a credit line is the best option. If you don?t want the pressure of managing a large chunk of money then monthly payments would be a better option. If you have a specific need for a large amount of cash, then the lump sum would be your best option.

If you do take the credit line and just plan to access money when you want or need it we would still recommend that you take some cash out and put it somewhere else for two reasons: first, you?ve gone through the whole process of getting a reverse mortgage you should probably reward yourself with some liquidity immediately. Second is very simple, don?t have all your eggs in one basket, if you leave all the money in the credit line and your house is destroyed then the credit line will stop. And just to clarify, I want to make sure you understand by your home being destroyed I mean beyond your insurance coverage ability to repair it. For example, if your home was destroyed by an earthquake and you did not have earthquake insurance, your credit line would stop. The same is true for any other natural disasters where your insurance is not going to repair your home, the credit line would stop. So if you left all of the money in the credit line, thinking that were the safest thing to do and your home is destroyed then you no longer have access to any of that money.

So if your strategy is to take some of the money and put it somewhere that is safe and secure then a bank account or an annuity would be fine. But do not do this strategy thinking that you?re going to get a better return on your money, you will not. Annuities and bank accounts are designed to be safe and secure, that is why you should put your money there. So if you have a mortgage broker or an insurance agent recommending that you do a reverse mortgage and then put the money into an annuity, you should find a different mortgage company to work with.

There are currently laws in place that make it illegal for a mortgage broker to recommend you do anything with the money. All they can do is offer the loan for you and it?s up to you to choose what to do with that money. I would recommend that you talk to a financial advisor or a family member and have a clear understanding of why you?re going to do the reverse mortgage and what you?re planning on doing with the money that you get from it.

I have been in the Financial Services industry since 1979 when I started as a Loan Officer for Wells Fargo Mortgage. Since then I have acquired my Securities Registration, Investment Adviser Representative Registration, Real Estate License, Insurance License and Mortgage Broker License in 22 States.

Source: http://whatismortgagerefinancing.com/reverse-mortgages-with-annuities-a-bad-combination/

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