Dave Parker, who is a fellow member of the North Phoenix Chamber of Commerce, and a Reverse Mortgage Specialist with The Lending Company, sent me the following information that I am sharing with his permission:
Why Do a Reverse Mortgage?
So you’ve retired – rested, relaxed, and taking a look at what might be next for yourself. Your finances appear fine. Why bother with a reverse mortgage?
If you don’t truly need money then don’t get a mortgage – conventional or reverse. But there are difficult conversations to have and hard things to plan and many people like to pretend things will always be the way they are now and that their income and expenses will remain fixed. On the other side, there are a lot of fears marketers play on to get retirees to spend money on things they will likely never need. I prefer to look at the most-likely future you will face and then look at less likely possibilities.
What is Predictable?
It is predictable that you will need some form of care and support. This may come from your spouse, your family, or some external agency. According to CDC statistics for 2005 the number of retirees having trouble:
|
Task
|
Over 65
|
Over 85
|
|
Walking
|
24.5%
|
46.3%
|
|
Getting in and out of beds and chairs
|
14.9%
|
30.0%
|
|
Bathing and showering
|
12.8%
|
35.0%
|
|
Dressing themselves
|
9.8%
|
24.9%
|
|
Eating
|
4.0%
|
12.2%
|
|
Using toilet
|
7.5%
|
22.4%
|
|
Doing heavy housework
|
29.6%
|
53.5%
|
|
Doing light housework
|
10.9%
|
25.3%
|
|
Shopping alone
|
15.5%
|
40.9%
|
|
Using the phone
|
8.6%
|
24.2%
|
|
Preparing a meal
|
9.0%
|
23.6%
|
|
Managing money
|
9.7%
|
30.1%
|
What is this telling us? Only something we intuitively know: our ability to do some things degrades as we age past 65 - for you, for me, for everybody. What happens when we can no longer do some of these things? We must make a decision. Many people these days are opting for in-home care because it is usually cheaper than managed care in a facility. But it can still cost quite a bit of money because it is long-term. How do you pay for that?
It is predictable that you will eventually pass away. What is also predictable is that income for the surviving spouse will decrease anywhere from 25-75% as a result. Why?
· 70% of retirees chose the higher monthly payout on their pension plans. This higher payout ends when they die unlike the lower payout that continues for their spouse.
· The surviving spouse loses the lower of the couple’s social security incomes.
How will the surviving spouse supplement their income to compensate for this?
What is Unpredictable?
There are many life events that are not likely to happen to you depending on your family genetics, lifestyle, and willingness to take care of yourself and live responsibly. My grandfather smoked until he passed away from lung cancer at age 89. That would probably fall under the predictable. What was unpredictable was that he passed away in a short period of time. Many stays in intensive care can go on a lot longer. The average stay in an intensive care ward costs about $2000-$3000. How do you factor that into your financial planning? If you were to contract heart disease, cancer, diabetes, hypertension, stroke, arthritis, mental disorders, osteoporosis, or pulmonary disease you could expect to spend an extra $1000-$1500 per month on top of Medicare coverage than you would otherwise. How do you cover that?
A Reverse Mortgage is not a Panacea … But it can be useful for two main situations:
· Negative cash flow – For whatever reason you are spending more money than you are bringing in. This needs to be corrected quickly before you run out of assets from which to draw, particularly if you are have expensive debt like credit cards.
· Buffer against the predictable and the unpredictable – Many retirees use the reverse mortgage expanding line of credit that draws interest every month as a buffer against financial problems that may arise.
Can’t I Just Take Action Later?
You certainly can take action later. This also has some risks you should keep in mind:
· I have done many reverse mortgages with recent widows who are dealing with not only the loss of their spouse but financial problems caused by the loss of their spouse. Do they all survive the experience? Yes. Would they have rather handled it earlier while their husband was still alive? Yes, all of them.
· Reverse mortgages may not be offered forever. It is a good bet that they will but the only buyer for them right now is Fannie Mae whose appetite seems to be waning.
· While the interest rate is always indexed to the treasury rate and the margin added to that rate is locked once the loan closes, the margin being locked has been increasing since late 2007. I used to close FHA reverse mortgages at the treasury rate plus 1.00%. Now I close them at treasury rate plus 2.75%. It is a good bet that that margin will continue to increase over the short term.
It takes a big measure of responsibility to take action in the face of no immediate threat but keep in mind that waiting has its risks as well.
I hope this information has educated you a bit on reverse mortgages beyond what the average loan officer will tell you. My goal is to get these loans in as many of the people who will benefit from them as possible. If you have a question about reverse mortgages please give me a call.
Dave Parker
Your Reverse Mortgage Resource At The Lending Company
602-750-8166
Comments
Why does everyone talk about whether I need money? If you don't need the money, or wait till you really need it. What's wrong with wanting to live more comfortably in my last 15 or 20 years? I don't need pants, but I wear them because I feel more comfortable!
I have two questions. First, can my future husband have his lender ad me to their DOT (Reverse Mtg.) after we are married? Second, since property values have drastically dropped how does this effect a Reverse Mtg?
To Jackie:
Questions 1: Unfotunately, no. You and your then husband would need to refinance the loan with a new reverse mortgage. You did not sign the original disclosures and they cannot do a re-disclosure so far from the loan closing date. That's the bad news. The good news is that you would not need to pay the FHA mortgage insurance on the refinance which would reduce your closing costs about 40%. We would have to look at your future husband's current loan to see if that would be advisable.
Question 2: Dropping property values is a big problem in the whole mortgage world because loan amounts are almost always indexed to the appraised value. Reverse mortgages are no exception. In fact, the loan amount for a reverse mortgage is based only on borrower age, the expected loan rate over the next ten years, and the appraised value. This is why retirees who wait may get smaller loan amounts later.
To Kevin:
You are right, of course. "Need" is a relative term. Please understand, the "need" for many of my clients is to stop having to choose between making their mortgage payment and eating.
There are many folks, though, who get a reverse mortgage to improve their lifestyle. I had one couple who had their retirement handled. They had health insurance, life insurance, long-term care insurance, an estate set aside for their kids, etc. What they didn't have was a lot of liquid assets. They used the reverse mortgage expanding line of credit to take $12K vacations each year for the next ten years. This is a rarer case these days. Still, quality of life matters as you say and it's definitely a consideration in many cases.
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