Loans in Reverse: Are They Good for My Needs?
By Donald Conrad and Hammid Firoozeh
“No matter how hard I try to budget, I can’t make ends meet. I need more money!” Sound familiar? If this is the situation you find yourself in, you are not alone. Even with Social Security, pensions, and retirement savings, millions of seniors are cutting it close, and more than a few are operating in the red. Our friends, Michael and Ellen, are two such people.
Michael is a 78-year-old retired state-government employee, and his wife Ellen is a 76-year-old retired New York City public-school teacher. They live in Brooklyn, in the house they’ve owned for 34 years. They have two grown children, Trevor and Diane, both of whom are married, have children, and live in Florida. Trevor is an electrical engineer and Diane is a management consultant; both have steady, sizeable incomes that don’t require supplementation from their parents.
Mike and Ellen receive decent pensions, which they supplement with Social Security. They also started retirement with a minor sum of “rainy day” cash, which they kept in a savings account. The trouble was that neither Mike nor Ellen put additional funds into a retirement account until retirement was very close. They burned through their nest egg by the time they were in their early 70s, which has been problematic for two intrepid people determined to maintain a pleasurable lifestyle on a fixed income.
Mike and Ellen love to travel, spoil their grandchildren, and to dash into Manhattan several nights a week for dinner and some form of entertainment. Having realized that their attraction to the vitality and diversity of the city only ripens with age, they have repeatedly rejected their children’s suggestion that they move to Florida. Yet continuing to “live it up” in one of the most expensive cities in the world meant that Mike and Ellen would go on spending more money than they took in — unless they could find a way to mine their biggest asset — their house — for valuable cash dollars.
Why the house? Lowering expenses by cutting back on travel and leisure would sadden Mike and Ellen because, as they see it, if you can’t do things that give you pleasure during retirement, when can you do them? Returning to work wasn’t an option, not only because Mike and Ellen see not too many employment opportunities for people their age, but also because Mike has Type-II diabetes and Ellen needs to remain available for caretaking and doctor’s appointments.
Fortunately, Mike and Ellen’s house appreciated greatly over the years, and is today worth 20 times more than what they originally paid for it. They considered refinancing or taking out a mortgage, but didn’t want to be saddled with undesirable payments. So Mike and Ellen turned their attention to reverse mortgages.
Given the circumstances, a reverse mortgage would appear to be a good choice for Mike and Ellen. Defined simply, it is a loan you take out against your home that allows you, the homeowner, to turn a portion of your home’s equity into cash without having to move out or repay any portion of that loan each month. With few exceptions, eligibility depends on two things: You have to be 62 years of age or older, and you must own your own home. Contrary to popular belief, you don’t give up the title to your home when you take out a reverse mortgage. However, the financing company jumps to the front of the line for payment upon sale and/or death.
Like most things in life, reverse mortgages come in various shapes and sizes. Depending on your circumstances and needs you can have this loan paid out to you in a single lump sum cash payment; in consistent monthly payments; or in a line of credit. Most people prefer the line of credit because it offers the greatest flexibility in terms of how much you want to withdraw, how often. The dollar amount you can get through a reverse mortgage depends on your age, current interest rates, loan fees, and the appraised value of your home.
The main and most obvious thing to consider when contemplating a reverse mortgage is whether or not you really need one in the first place. Should you determine that a reverse mortgage is indeed necessary, we recommend that you consider the following caveats:
• This sort of loan is not good for seniors who are not sure how long they want to stay in their home.
• Property taxes and house insurance still need to be paid separately.
• High closing costs are common, and can be up to $10,000 per $200,000 loan.
• A limited number of companies offer reverse mortgage loans (i.e. FHA, Fannie Mae, etc.)
• Ramifications for your heirs: If you leave your house to them, they become responsible for the loan upon your death. If they can’t repay the amount of equity taken out through the reverse mortgage, they will be forced to sell the house and pay off the amount due with money from the sale.
Bottom line under most circumstances: A reverse mortgage is not the best option for young seniors. If you’re in your 60s and strapped for cash, we recommend taking on a part-time job, downsizing your house, moving, or reducing your expenses. We recommend these alternatives mostly because life expectancy has increased, which expands the likelihood that you’ll outlive your savings. But if you’re in your late 70s or 80s, or have serious health issues, a reverse mortgage might be for you. In Mike and Ellen’s case, it did make sense. They’re too attached to New York City to consider moving any time soon, yet they enjoy paying visits to their children and grandchildren multiple times a year. Mike and Ellen are also approaching 80, and both of their children are financially solvent.
Confident that Mike and Ellen understood the various pitfalls associated with reverse mortgages, we encouraged them to go through with the process. Two weeks after they closed, they were down in Florida, attending their eldest granddaughter’s high-school graduation.
