Solutions for Seniors (and their families)
When I meet with groups of people, I often ask those who are saving money for retirement to raise their hands. Whether accurate or not, most hands go in the air. I then ask everyone who is saving money for their parent’s retirement to leave their hand up. Rarely does a hand stay in the air and this highlights a problem more and more people are facing; helping mom and dad pay their bills. I find that a great many adults who are nearing their own retirement years are burdened with the cost of caring for the financial needs of a parent who is still living. These after-tax expenditures make it difficult to set aside sufficient funds for one’s own retirement plan.
Every retirement planning calculator I’ve used (including the Social Security Administration’s) allows me to project my future retirement income based on a savings plan. They don’t factor in the expenses I will have. We all enter retirement with a good idea of our income but it’s difficult to project expenses for medical care for conditions we don’t yet have or the cost of medicines we don’t yet take. Once we’ve reached that point of discovery, it may appear to be too late. There is an easy solution – the reverse mortgage product.
It’s at this point that many stop reading. It’s because we assume that we know all there is to know about reverse mortgages. I find that many people love them and there are those who are not fans or believe that they are a loan of last resort. The interesting thing to me is that folks love or hate reverse mortgages based on incorrect beliefs about the features and benefits. In fact, I’ll go so far as to say that it’s the most misunderstood loan program available. I’ve outlined some of the key features and common misconceptions about reverse mortgages below.
In all cases, we can pay off any underlying liens and eliminate the monthly principal and interest payment. As the senior continues to own the property, they will be responsible for payment of taxes and insurance on an ongoing basis. The senior then chooses their preferred method of receiving the remaining funds. Some elect to take a monthly amount that is guaranteed for life or a higher amount for a defined term. Others opt to take cash or to leave the remaining funds in a line of credit for future use. Seniors can even blend these options to maximize the benefit they receive from the loan.
One of the reverse mortgage features that has caught the attention of financial planners is the line of credit growth factor. Seniors who use a reverse mortgage and set up the line of credit early in retirement are much more likely to have their funds last through retirement when compared with folks who wait until they exhaust their savings before taking the reverse mortgage. The line of credit can also help you and the senior manage sequence of returns risk when deciding if and when to liquidate other funds. As an example, a 62 year old who owns a $200,000 home can have an initial line of credit of just under $98,000. If left untouched, this available line grows to over $163,000 at age 70; $218,000 at age 75; $307,000 at age 80; and $387,000 at age 85. This growth is indexed to the LIBOR and the growth I mentioned is based on the past 10 years performance with the potential to be higher. When most retirement plans are running out of cash, the senior who took this line of credit and allowed it to grow would have the ability to access large sums to replenish the retirement plan they created.
The reverse mortgage products offered by NOVA® Home Loans are the HUD-insured HECM reverse mortgages. This means that access to the line of credit or monthly income is guaranteed by the US Department of Housing and Urban Development. It is important to note that these loans aren’t “endorsed” by HUD or any agency of the federal government.
Here’s something you probably didn’t know, a senior can use a reverse mortgage to purchase a new primary residence. That’s correct, they can purchase a new home and never have to make a monthly mortgage payment.
Here are some of the more common myths about reverse mortgages:
I cannot get a reverse mortgage if I have an existing mortgage.
The proceeds from the reverse mortgage are first used to pay off any existing mortgages or liens. The reverse mortgage will eliminate the existing monthly payment and is the most common reason most homeowners 62 years and older take out a reverse mortgage.
If I take out a reverse mortgage the lender will own my home.
Seniors retain the title and ownership of their home during the life of the loan and can choose to sell the home at any time. As long as the senior continues to live in and maintain the home and property taxes and insurance are paid, the loan cannot be called due by the lender.
I won’t qualify because I have bad credit or little income.
Government-insured reverse mortgages don’t require a monthly payment so income and credit guidelines are minimal. The senior keeps the title to the home and is responsible for maintaining the taxes and insurance. We will ensure that this ability exists. Reverse mortgage purchases do require that we source the funds to close. The reverse mortgage program is a great marketing tool to catch the attention of your REALTOR partners. How many doors can you open when you mention a loan with limited income or credit qualification AND no monthly payments.
Reverse mortgages are expensive.
Reverse mortgages don’t require a monthly payment and are a cost effective option for seniors who plan to remain in the home. As with all loan products, there are closing costs that are deducted from the available proceeds and an upfront mortgage insurance premium. Because the program is customizable, these costs can vary from individual to individual.
There are restrictions on how I take the money or how I use the proceeds of a reverse mortgage.
The senior can use the proceeds any way that they wish with one exception, they cannot pay someone simply for advising them to get a reverse mortgage.
Seniors can use the money for:
- Elimination of existing monthly mortgage payment
- Medical Expenses
- Pay property taxes or insurance
- Purchase an annuity or long-term health care coverage
- Large purchases (RV, second home, etc.)
- Early inheritance distribution
- Normal household expenses
- In-home healthcare
- Home repair or improvement
- Anything they want or need.
Reverse mortgages are only for seniors who are poor
Reverse mortgages help low to moderate income seniors but are also an essential part of a retirement plan for many seniors. According to a study by a Nobel winning economist, a person who takes the reverse mortgage line of credit feature early in retirement and allows the unused portion to grow will have a much greater chance of having sufficient funds throughout retirement when compared to those who wait until they run out of money to take a reverse mortgage.
After a certain period of time, the lender will evict me
As is the case with forward mortgages, the senior retains the ownership of the property and can sell or pay off the loan at any time. The senior is responsible for keeping tax and insurance payments current as well as the maintenance of the property. The loan will continue as long as at least one borrower occupies the property as the primary residence
A reverse mortgage will affect my government benefits
A senior should always consult with benefit specialists before making financial changes. With a reverse mortgage, the senior can access the equity by receiving cash, taking a line of credit, or a guaranteed income for life. The funds received are the proceeds of a loan, and as such, are generally not taxable. In some situations, seniors can affect Medicare benefits if they choose the cash option and place these funds in the bank. Our dedicated reverse mortgage team never provides tax or Medicare advice, but we do encourage the senior to check out all of their options and have a program fit their every need.
I’ll leave my children with a large debt when I die
Because reverse mortgages don’t require monthly payments, the interest and government insuring fees are added back to the loan, causing the balance to increase. Increases in the value of the home may offset this loan increase and cause the equity to remain the same however. More importantly, the reverse mortgage allows the senior remain in the home without relying upon family members for assistance. When the loan comes due, the senior or their heirs will be able to sell the home and keep the equity. If the loan balance is greater than the value at that point, the Department of Housing and Urban Development will pay off the shortfall and the seniors or their heirs will not have to repay that amount.
NOVA® Home Loans has a team of reverse mortgage specialists dedicated to finding solutions to many of the financial issues faced by seniors. These options aren’t “one size fits all” and it’s important to understand if and how a reverse mortgage might fit a financial plan. It starts with a simple phone call.