PEOPLE: Husband and Wife
HUSBAND: Age 65, who has not been well for some time.
WIFE: Age 65, who has spent her life raising children in the “best possible way”.
OTHERS: Grown Children, ages 21and 41
REVERSE MORTGAGE EXAMPLE SITUATION AND DILEMMA:
Husband and Wife made a conscious decision many years back, when their first son was born, that Husband would care for the finances by earning an income to support the family and that Wife would care for the children as they grew up, helping them with all and every thing possible. And, they did just that! (Wife did a great job. Husband did average. Go figure!)
But two years back, the husband had heart surgery. Today, both are still alive. Husband continues to work. They now talk about “how” the wife would carry on, in the event the Husband is no longer in the picture. (And, that is not “if” the husband is out of the picture….but rather “when”)
Because the wife had spent her life raising the children, she had not been able to keep up with computers, management, administration and other disciplines that the work world requires, for higher paying jobs. Therefore, if the husband were gone, so would the majority of their income. The wife would have to find an income to pay for the mortgage, the taxes, the insurance, the utilities, the food and all other living expenses. A house payment of $2,010 per month would have to be paid “the first month” after the loss of the wage earner. So would all the utilities and insurance and other essentials.
The wife would be forced to work in an hourly wage position. Assuming a wage of $10.00 per hour, that would bring in $400.00 per week, or about $1,600 per month! Not enough for even the house payment. The only temporary solution is that the husband remains alive and well and continues to work. This is not a good solution! Husband and Wife are “in a pickle”…..just like millions of other seniors. Sooner or later, “almost” every one realizes they need more money coming in…..than is coming in….and they can do nothing about it!
They purchased a home six years ago. Today, the home is valued at $460,000.00. There is debt on it of $150,000.
Husband and Wife decide to apply for a second mortgage to help them with payments on the first…….whoops….no….that is not even a possibility. Forget that! Let’s start over…..
Husband and Wife go to a friend and get a “second mortgage” which has a high interest rate and balloons in ten years……when they are both 75……whoops….no…..that is not even any possibility and that is “stupid”! Forget that! Let’s start over……
Husband and Wife sell their house and move to a rental unit so that……whoops……nope….never….they want to remain in their “home”, their “nest”, their own domain…..so renting is out……Forget that! Let’s start over…..
Husband and Wife decide to apply for a “Reverse Mortgage” (RM) from American Reverse Mortgage. They are in a county (Broward County, Florida) were the current “valuation” of homes (the cap placed on homes in this county by HUD) is capped at $365,000.00. Still, they find they can receive a mortgage with proceeds paid as follows;
· The value of the home was higher than the “cap” for the county or zip code, so the value of the home was set at the “cap”.
· For their county that was $368,000.00.
· They qualified for a RM loan of $177,265.00.
· That was the “net” proceeds paid to them after all closing costs, which were taken out of the loan itself.
· They paid no “out of pocket” closing costs.
· To get the loan, they initially paid a fee of $375.00.
· This fee was paid back to them immediately after closing.
· They were called by HUD and had a HUD counselor go through Reverse Mortgages.
· They had their home appraised.
· They had their home inspected.
· All of this took about 60 days.
Oh, by the way, they did not have any problems getting “approved”, since this loan was not based on their ability to pay it back, not based on their current or future income stream, not based on their credit history.
Then they had a loan closing. At the closing escrow paid off the loan amount of $150,000.00. The balance of $27,000 was given to them. Therefore, here is what they ended up with;
• The same home they had lived in before.
• The same home they wanted to live in for the rest of their lives.
• A home on which they did not have to pay the mortgage ever again.
• $27,000 dollars in cash to use for future real estate tax payments and insurance payments.
• The ability to take any future income and put it toward other costs and living expenses. The husband was still working and his income could be used elsewhere.
• The ability for the wife to gradually enter back into some higher paying job market, if she desired to do so.
• A “piece of mind” for Husband, realizing that he would not leave his family “without shelter”.
• A “piece of mind” for Wife, realizing she would not be “without” a home.
The price of homes continued to increase. The amount of the debt they had borrowed via the Reverse Mortgage increased each year by the amount of the unpaid interest.
“At some time in the future”:
• When Husband is gone, then Wife will continue to live in this home and to live there peacefully.
• When Wife is gone, then the estate will have one year to pay off the loan or sell the home.
• The price of the home will have increased (in almost all cases) at the same dollar rate or more, than the cost of the loan!
• The loan balance currently increases by (approximately) 6-7% per year, a fluctuating amount, but that’s close.
• The value of the home….more than twice the amount of the loan, increases at least 4% per year. (just consider what the rate of appreciation has been over the last 3 to 5 years)
• Assuming these two variables are correct….the “equity spread” will remain.
• if it does not, since this is a non recourse loan……when required to be paid back, if the funds from the sale of the house are not enough, the mortgage insurance pays the balance, not the estate!
• “If”, and this may never happen, but just “if” it does…..”if”, for instance, there is a “new landfill” that is planned just down the block, or “if” a sinkhole appears, or “if” a hurricane floods the entire area…..and due to any of these things …… the value of the home drops to a point lower than the cost of the loan and accrued interest…..the amount due will be paid off by the Mortgage insurance and not by any heirs or by the estate.
What about the children of Husband and Wife? They were happy that their parents were better protected financially. They preferred to see their parents “live comfortably” rather than save everything and will it to the children when the parents passed away. The parents realized “it is better to have money to be able to spend time with your children and grandchildren now, as they grow older…..rather than…..to save money so that when the parents are gone, the children will have more money!
Also, the parents realized it was better to “live in their own home” than to go and live with the grown up children! Great idea. Works for a few weeks. But living in one’s “own” home is better than living in “some one else’s home”.
So, here is the “deal” that we are all dealt at some time in our lives. This is the “hand” we are dealt. We are all “children” in grown up clothes and bodies the same. But some day, at some point in time, the fence we used to “leap” over, will be too high. And some day, at some point in time, the income we used to “expect”, will no longer be possible.
But the payments on our home……will be the same, or the need for additional cash….will be the same. In this scenario above, if there were no existing loan, Husband and Wife could have obtained the Reverse Mortgage and received the entire amount in cash, or left it in a “line of credit” that would grow by (approximately) 7% per year.
(All figures here are “close, but not accurate to the last fraction. Grammar and spelling is not correct, either. But you get the idea! If you have any questions…….if you know of any one who is 62 or older, owns their own home, and has “some” equity in it, and, while being “equity rich” are also “cash poor”….. Have them call us for details.)