Many of your Boomer clients have elderly parents who are facing a seemingly unsolvable problem: how to produce enough income to cover increasing living costs without jeopardizing investment principal.
But for families in the right situation, it’s possible to dramatically improve the cash flowing to the older parent, without risking the value of (or access to) her “rainy day” fund.
Here’s how reverse mortgages can serve as an unorthodox solution to a common dilemma.
Our Hypothetical Subjects
Bob and Carol are looking after Bob’s healthy 85-year-old mother, Alice. Alice lives in her paid-for home that’s worth $300,000. She has $200,000 in certificates of deposit, and receives $1,000 per month in Social Security checks.
However, her monthly expenses are $2,500. Even at a generous rate of 3 percent, the $500 in monthly interest that her CDs could yield will still leave Alice $1,000 short. Trying to exceed that safe rate of return could expose Alice and her money to too much risk.
True, she could sell the house, invest the proceeds, and move into an apartment or assisted living facility.
But assume she sells the house for $300,000, and invests that money in CDs at the same 3 percent. That provides another $750 per month in income, which likely won’t cover the rent of even a modest apartment in most areas.
Besides, if Alice enjoys living in her home and is capable of safely remaining there, it would be unfortunate to uproot her just because she can’t earn a decent rate of return on conservative investment options.
Reverse Mortgage to the Rescue
Alice can substantially boost her net income and liquidity with minimal disruption to her lifestyle by taking out a reverse mortgage against the equity in her home. The actual proceeds depend on several factors, including the homeowner’s age, the value of the home, current interest rates, and the geographic area in question.
But according to the calculator produced by the National Reverse Mortgage Lenders Association (www.reversemortgage.org), Alice could either take a lump sum right now of almost $180,000, or initiate an ongoing monthly payment of around $1,600.
Either payment form is tax-free, and therefore will not increase the likelihood of subjecting her Social Security payments to taxation. So if Alice takes the monthly payment option from her reverse mortgage, and keeps her savings earning 3 percent, she would have $3,100 coming in every month—a surplus of $600 over her current expenses.
The biggest fear many older homeowners have about obtaining a reverse mortgage is the worry that they might “lose the house.” The reality, though, is that as long as the house is Alice’s primary residence, she gets to live in and keep her home for as long as she wants (or can), with no repayment required.
That ownership status changes only after Alice dies, designates a new home as her principal residence, or lives somewhere else (such as a nursing home) for at least twelve months. In any of these events the lender would then put the house on the market. If the eventual sale price is greater than the amount originally borrowed (plus any fees and interest accrued), Alice or her heirs would get the difference.
If the sales proceeds are less than the amount owed, Alice and/or her family would owe nothing. The lender is then likely to be made “whole” by the Federal Housing Administration. Keep mind that interest and fees on the borrowed amount accumulate until the loan is paid off or the home is sold. So the longer Alice lives in her current home, the more likely it is that the equity in the home will diminish.
In turn, the lost equity makes it less likely that Alice’s children will inherit the home. But that’s typically not the family’s top priority in this situation. And if it is, the children can either eventually pay off the outstanding balance, or try to buy the home if and when the lender puts the place up for sale.
The only other requirement of keeping the reverse mortgage in effect is that the property taxes and insurance are paid on time, and the house’s condition is maintained.
The relative allure of reverse mortgages has been enhanced by economic developments of the past few years, and legislative changes a few months ago.
The decline in the housing market and economy have caused more older homeowners to use reverse mortgages to cover retirement expenses, and also made it more difficult for lenders to dispose of homes at prices high enough to cover borrowed balances.
These forces are understandably taxing the government’s related insurance funds. If the trends continue, it may be more difficult and expensive to obtain a reverse mortgage later, at least when compared to today.
Another reason to consider reverse mortgages right now is the “HECM SAVER” program announced by the FHA late last year (“HECM” is the FHA’s term for a reverse mortgage, and stands for “Home Equity Conversion Mortgage”).
The SAVER offers borrowers a substantial discount in upfront and ongoing fees, in exchange for a modest reduction in the amount of money available to the homeowners.
You can get the lender’s take on reverse mortgages by visiting the aforementioned industry’s site (www.nrmla.org). AARP understandably takes a great interest in the tools as well, and has a vast resource page at www.aarp.org.
However, there are two resources that are essential to anyone considering a reverse mortgage for themselves or a family member.
The first is the government’s site at www.hud.gov, where homeowners can research information on lenders, terms, and look for an approved counselor—whose advice may be mandatory for borrowers seeking certain reverse mortgages.
The second is an attorney who not only understands reverse mortgages, but also how the risks and rewards may affect a particular borrower and her family.
You can search for such a professional by visiting the website of the National Academy of Elder Law Attorneys at www.naela.org.