by John Darer® CLU ChFC MSSC RSP CLTC
What is a Reverse Mortgage?
A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash, credit line or monthly payments. Reverse mortgages were conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction how reverse mortgage proceeds can be used. The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the borrower lives in the home he or she is not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance and homeowners association dues (if applicable). Source: National Reverse Mortgage Lenders Association
Structured Settlement Secondary Market Sales Pitch "No Loans, No Debt, Just Cash Now"
Annuity Action Network, a member of DRB Capital, asks "Were you considering a Reverse Mortgage to get cash now? Then responds that a Reverse Mortgage is really just a fancy term for a loan. The Annuity Action Network has solutions for you!" The tag line "No Loans, No Debt, Just Cash Now". If you have an annuity or receive payments from an insurance company, you can get the cash you need now!"
Consumer Financial Protection Bureau (CFPB) Warns Consumers About Selling Their Structured Settlements
What is a Mortgage?
A mortgage loan, also referred to as a mortgage, is used either by purchasers of real property to raise funds to buy real estate; or alternatively by existing property owners to raise funds for any purpose, while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property. This means that a legal mechanism is put in place which allows the lender to take possession and sell the secured property ("foreclosure" or "repossession") to pay off the loan in the event that the borrower defaults on the loan or otherwise fails to abide by its terms. [ Source: Wikipedia]
I think its safe to say that anyone who has purchased a home or thought about a purchase of a home, or grew up in a non rented home, knows that a mortgage is a loan. So what DRB Capital/Annuity Action Network is doing is trying to razzle dazzle you when the simple question is are you better of selling your structured settlement or doing a reverse mortgage?
What is the Structured Settlement Doing For You?
A structured settlement provides stable tax free income if you are receiving such payments as damages on account of a physical injury, physical sickness or wrongful death. You may be a beneficiary of someone whose injury was the basis for establishing the structured settlement and if so enjoy the same tax advantages. A stable tax free income helps address by all accounts the leading fear of people over age 62.
It's important to know that no matter who you go to, if you sell the rights to structured settlement payments in exchange for a cash lump sum you never get close to the full amount of your payments. That's because payments are sold at a significant discount. Chances are good that the discount rate exceeds the internal rate of return that you are getting on the amount that was placed in the structured settlement was established if you just keep receiving the structured settlement payments for the rest of your life or until they stop. That's your cost. Moreover, even if you sell part of your payments you have to get by without those payments coming in.
Discount Rates on Structured Settlement Factoring Transactions May Exceed Reverse Mortgage Interest Rates
Following is sampling of fixed rate reverse mortgage rates that were available on the date of publication of this post
3.99% APR 5.37%
4.24% APR 5.64%
Source: All Reverse Mortgage Inc.
You will find by shopping around that effective discount rates for lump sum for structured settlements could be 6-13%. And the big names that advertise a lot on TV have big overhead to cover.
While property taxes, homeowners insurance and homeowners association dues (if living in an association) are required by the terms of the reverse mortgage , if you sold your structured settlement payments and remained in the same home, these are expenses that you would have to bear anyway.