Here’s How Reverse Mortgages Help Cash-Strapped Retirements

The road to a comfortable retirement is paved with unexpected twists, turns and rocky terrain that can derail your journey. In the event retirees find themselves strapped for cash, there are several ways they can increase their spendable income using a reverse mortgage, says one personal finance columnist.

Reverse mortgages have often been touted as financial solutions for homeowners who are “house rich,” but “cash poor.” They can also be viable tools to help homeowners free-up funds

They can also be particularly helpful for homeowners looking to increase their monthly cash flow, while also freeing-up funds paid on housing related expenses.

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“Our homes can be costly beasts,” writes finance columnist Scott Burns in a recent article published by the Houston Chronicle. “Even if there is no mortgage, there are bills to pay. The real estate tax, insurance, utility, repair and other bills remain.”

In the article, Burns provides several examples of how a reverse mortgage can increase the spendable income for a retired couple, aged 66 and who own their $300,000 home free of mortgage debt.

Burns also assumes this couple lives in a high-cost area, so the operating costs on their home are 4% of its value, or $12,000 per year. As medium-income workers, the couple’s combined benefits total $37,000 per year. After paying their shelter bills, they have $25,000 to live on.

“Can they do it? Sure,” Burns writes. “Millions of lower-income retirees get by on far less. Will they be comfortable? That’s doubtful.”

One way this couple could increase their spendable income would be by getting a reverse mortgage line of credit, or a guaranteed lifetime monthly payment.

Using an online reverse mortgage calculator, Burns finds that the couple, which he has dubbed “The Shortcashes,” would be eligible for a net credit line of $164,700, or a monthly payment for life of $938 per month, $$11,256 per year.

“So cash advances will cover the annual cost of shelter, and their spendable income increases from $25,000 to $36,256,” Burns writes. “That’s an increase of nearly 50 percent—all tax-free and without moving.”

The Shortcashes could also choose to move into a lower-cost area, particularly where the annual cost of operating a house is about 3% of market value.

“In that move they can buy a house for about $300,000 with a purchase-money reverse mortgage, putting down less than 50 percent,” Burns writes. “With the purchase-money reverse mortgage, they will have no mortgage payment and will be able to stay in the house until they die or are no longer capable of living there.”

The lower operating expenses of $9,000 will also be nice, he adds.

Read the Houston Chronicle column.

Written by Jason Oliva

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  • OR they could purchase a new home with 80% down instead of 50% and establish a HECM line of credit that will grow throughout their retirement AND still pocket the remaining 20% from the sale of their first home.

    • Prospec,

      It is too bad that such a high percentage of originators choose to justify their greed by adopting the exclusive use of fixed rate HECMs as their best business model practice. By doing this, they ruin all chances of their borrowers being able to take advantage of the cash flow advantages of the line of credit.

      My concern is not as much about the percentage of proceeds used to acquire a home with a H4P but rather whether the underlying HECM is fixed or adjustable rate. Unfortunately many of those who claim that seniors want fixed rate are the same ones who accused originators who originated adjustable rate Savers and Standards of steering and manipulating seniors just a few years back. These are the ones who HUD needs to rein in.

  • Good article and a great comment by Prospec.

    There are so many scenarios we could use to show how a reverse mortgage can help those burdened with expenses at retirement, especially those seniors who own their home free & clear!

    What I see that is so encouraging is that Jason keeps pointing out to all of us the amount of articles being written by the likes of Scott Burns published in the Houston Chronicle.

    This in itself is not only putting out positive publicity on the reverse mortgage product but as I once said before, these articles are great to show your senior clients or your financial planners and community bank prospects.

    I say in closing to Jason, keep picking up on these articles, keep them in front of us. I know it helps me and it gives me something visual to show our prospects!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      You are right but the problem is many of these articles that are positive, describe HECMs in such a way that after a few paragraphs in which they describe HECMs you wonder what it is they are so positive about. Whatever they are describing, it is not a HECM or for that matter any other reverse mortgage.

      Until the quality of the articles rises, it is hard to freely present the articles without heavily redacting the content especially for those planners who will incorporate the information and basic models into their financial planning practices. So if all you are going to use the articles for is prospects, that might work with less financially sophisticated prospects but with those who manage their own portfolios or retirement plan and IRA assets, it may not.

      Time will come when what we consider positive articles now will hang over our heads as distortions of how HECMs are and how they work.

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