What else is out there?

The other two most common products for seniors are an equity share, or an appreciation advance.

Both accomplish the major goal of a senior product, generating cash without payments, with little or no qualifying.  Each of these generates a lump sum of cash, not ongoing income, but can be “turned into” cash flow in a couple of ways. 

First, if there is a mortgage that needs to be paid off, paying off that mortgage will allow cash flow that was previously “earmarked” for that payment to be brought back into the budget. This frees the money to be spent on something else.  Both the equity share and appreciation advance allow for mortgages to be present (with some restrictions), so a mortgage payoff is not generally required as part of the transaction.

Second, the money generated by these programs can be parked in a CD or other safe investment and the interest that is generated can be used for cash flow.  At today’s rates, that is not going to be a substantial amount, but it is a possibility.

Third the “principal” can be invaded, for as long as it lasts. 

Finally, the money can be invested (with extreme caution) into an annuity or other investment vehicle.  I am not a huge fan of annuities due to the complexities of these instruments.  There are options and protections that can, and often should be, added to these insurance products.  Each of these protections can add costs, or reduce income, so making the choices can be difficult.  In addition, agents can make huge commissions on these products and so may be tempted to sell them in situations where other investments may be more appropriate.

We’ll get into more details regarding these reverse mortgage alternatives in another post, or feel free to contact me if you need information right away.

Reverse mortgages need to be appropriate

I recently sat down with a lady whose husband was in a nursing home.  The cost of care was going to run $5000 per month (her contribution).  The reverse mortgage, or any of the other senior products that I could offer her, were going to generate about $60,000.  The reverse mortgage after paying off her mortgage, and the other products leaving the mortgage in place. 

As you can see, any of the products would last her about 30 months – 2 1/2 years.  Her husband’s life expectancy is between 5 & 7 years.  Tough situation!  The reverse mortgage added one feature that the equity share or appreciation advance did not, the fact that it also eliminated her mortgage payment, which would stretch how long her cash would last, but not by a huge amount.  The bigger benefit, is that the reverse would allow her more flexibility to stay in her home after the cash ran out, regardless of what happened with his care. 

As is normal in these situations, I meet with the customer once, explain the options, and go away for a while to let her think.  Her decision is a tough one.  Does she sell now into a declining market and take what cash she can?  Does it make sense to move to another area where costs are lower?  Does she go ahead with one of the products and buy herself some time to work on other options?

The trouble with buying time is that there are so many unknowns, and so many that cannot be known.  Where will the real estate market be?  Could she recover some of the money she “lost” as the market has declined?  Will her need for cash increase?  This could easily happen in at least two ways – the cost of the health care and general inflation.  If she buys the time will there be more or less options available in the market to help her?

Remember, reverse mortgages and other senior products should always be compared to selling, not to a “regular mortgage.  If we put her in a “low cost” regular mortgage, she could actually generate enough cash to cover her expenses for about another 6 months.  But then she would be FORCED to sell, or face foreclosure and lose everything, because she would not have the cash or the income to make the payments.

These decisions are never easy, but knowing what the options are puts the senior in the best possible position to make a good decision. 

Reverse mortgage Questions, final round

How is a reverse mortgage different than a regular mortgage?

There are three primary differences;

·         There are no income requirements

·         There are no credit requirements, and

·         No loan repayment for as long as you live in the home

 

Aren’t reverse mortgages expensive?

There can be significant costs associated with a reverse mortgage, however most of these fees can be financed as a part of the mortgage.  For those that are concerned with fees, some programs offer reduced or no fees. 

 

What else do I need to know?

·         You can never owe more than your home is worth.

Reverse mortgages are “non-recourse” loans meaning that the lender can never look to anything or anyone beyond the value of the home.  Your estate will not owe anything to payoff the mortgage balance.  In addition, some programs allow for “setting aside” a protected portion of your home’s value that will stay with your estate.

·         There are no restrictions if you wish to sell the home.

The balance of the reverse mortgage is paid off as a part of the sale just like any other loan.

·         You can’t be pressured into a reverse mortgage.

ALL of these programs require counseling from an independent counseling agency.  In addition, we welcome you to bring your advisors with you as we are discussing the programs.  We would also be happy to provide you with booklets from AARP –Home Made Money, a consumer’s guide to reverse mortgages, or Fannie Mae’s Money from Home – A Guide to Understanding Reverse Mortgages.

contact me at scott@scott-larson.com for more information

More reverse mortgage questions

What can I do with the money?

There are NO restrictions on how funds are used.  Common uses for reverse mortgage funds include:

·         Supplementing retirement income

·         Buying a new car

·         Making home repairs

·         Planning your estate

·         Traveling

·         Paying for your grandchildren’s education

·         Covering Medical expenses

           

How do I get my money?

You have options in how you take the money.  You can choose a lump sum, a monthly payment amount, a line of credit or a combination of these.

 

Will my reverse mortgage affect my Social Security?

No.  Reverse mortgages will not affect Social Security or Medicare.  These programs are not based on assets of the recipient, and so are not affected by the addition of a reverse mortgage.  Other benefits such as SSI could be affected depending on the particulars of the program. 

Consult a benefits specialist for program particulars.

 

The most common senior product – reverse mortgage

The most common of the products is the reverse mortgage.  Here are some common questions that we hear

What is a reverse mortgage?

A reverse mortgage is a financial instrument that allows homeowners over 62 years old to access money that they have built up as equity in their home.  They are designed to strengthen a senior’s personal financial situation without a monthly payment burden during the lifetime of the loan.

 

Does my current mortgage need to be paid off?

No!  These loans are designed for owners with equity, but the home does not need to be completely paid off.  In some cases we see no money taken from a reverse mortgage, but simply use it to eliminate their mortgage payment.  Any mortgage that is in place will have to be paid off as a part of the reverse mortgage transaction.

 

Can the lender take my home?

No.  The home stays in your name, and you have complete control of your property.  You are required to keep the property maintained, and pay the taxes and insurance, just like any other loan, but you would do that anyway! As long as the home is your primary residence, you are protected.

 

What if I can’t stay in my home due to illness or other reasons?

If all the homeowners permanently leave the home, then the loan becomes due and payable.  Extended vacations or hospital stays are not a problem.  Absences of over 12 months should be discussed with the lender. 

 

What is a senior product?

A senior product is a financial instrument that is designed to unlock or release equity from the home without payments, and with little or no qualifying.  There are three major types of senior products a reverse mortgage,  an equity share, and an appreciation advance

 

A reverse mortgage is available to seniors age 62 and over.  The most common reverse mortgage is a HECM, or Home Equity conversion mortgage.  This is a loan that is insured by the Fha, or Federal Housing administration.  The funds from a reverse mortgage can be taken in three ways, as a lump sum, a line of credit,  as a monthly payment  or as a combination of the three.  The reverse mortgage is a rising balance loan as all of the interest that is charged on a reverse mortgage is added to the balance as it is earned by the lender.  A reverse mortgage is a loan, and like any loan, it is just a lien on the property.  The lender does not own or control the property.  With a reverse mortgage you pledge the entire value o f the property, but you can never owe more that the property is worth.

 

An equity share agreement allows an investor to buy a percentage of the property and participate in the growth or loss of the property.  This program will allow you to get between 10 and 15%  of the property value as a cash payment up from in exchange for a participation of up to 35% of the property value This is whether the property value goes up or down.  There is no interest on an equity share program and there is no restriction on age!

 

The final senior program is an appreciation advance.  With an appreciation advance you are trading all or part of the future appreciation of the property for up front cash.  There is no repayment of the amount that is received, but the senior must be able to qualify for life insurance.  The insurance is paid for by the appreciation advance company .  Once again you can get between 10-15% of the current value of the property.  Two additional unique features of this program are that the appreciation company has no claim on the current value of the property and this is the only program that is not limited to owner occupied properties.