Sure, it has no servicing payments and the maximum payback is capped. These things can make the reverse mortgage look more friendly than conventional mortgage products. The product also boasts zero mandatory periodic payments and zero reach-back if your house goes underwater. Nice.

But the cost is not zero, and the interest rates are higher than they are in conventional mortgages. As I write this, Bankrate reports that the average fixed rate is 3.4% on a standard conventional 30-year mortgage, and it’s 2.7% on a 15-year mortgage. Those are low.

Meanwhile, in many cases the costs of a reverse mortgage are unknown because most of them carry variable interest rates, usually tied to a short-term LIBOR rate. The LIBOR rate is added to a fixed lender margin and mortgage insurance. At a recent conference session I attended, a member of the Swiss Army boasted that the combination of the insurance and margin was “only” 3.5%.

It is not hard to imagine a scenario in which a borrower, attracted to the product because there are no current payments required, opts not to make payments and then, because of the compounding nature of interest, sees the loan balance increase to the point the borrower can’t pay it off. The loan then eats up all the equity in the home.

Rates don’t have to increase much to accelerate the process of wiping out the equity. That may be a perfectly acceptable trade-off for some, but the reverse mortgage is a debt that needs to be managed if the borrower wants to get the most out of home equity as an asset.

Improper interpretation and poor strategic uses are avoidable if investors get educated. (Among stories they might read are “Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage,” by Shaun Pfeiffer, John Salter and Harold Evensky in the Journal of Financial Planning or “HECM Reverse Mortgages: Now or Last Resort?” by Pfeiffer, Salter and Angus Schaal, also in the Journal of Financial Planning.)

I’m also skeptical about how these products will align with client values. Some members of the Swiss Army seem to think clients will view them as innovative thinkers who are putting a creative (even fun) product to smart, strategic use. But in over a quarter century of working with retirees, I have yet to hear anyone say, “I wish I owed money on my house.” 

Reverse mortgages are still debt, and a lot of clients will not take kindly to the idea, which harms their sense of control and independence. The owner of a paid-off home doesn’t answer to a bank or the government in the same way a borrower does.

I always credit former FPA President Elizabeth Jetton with this quote, but I think she got it from Einstein: “Not everything that counts can be counted and not everything that can be counted counts.”

There is real and substantial value in the psychological benefits of being debt-free, even if that value is unquantifiable. A client who has worked a lifetime to be a retiree sans mortgage may have a hard time getting his or her head around the idea of now using debt that could wipe out the home’s equity. If a smart strategic use of a reverse mortgage could help borrowers with specific problems, of course, we owe it to them to explain reverse mortgage options. Our integrity requires us to tell people things they don’t want to hear if that’s what they need, but we should also be prepared to receive some negative reactions.