The Ideal Reverse Mortgage Candidate, Part 2
According to The Street, the number of American homeowners over 65 with mortgage debt is up nearly 60% in the last decade. Though mortgage rates have fallen significantly in the last 10 years, home price appreciation has dramatically outstripped wage growth. This has made it more difficult for many homeowners to pay off their homes before retirement.
In a previous article, I identified three ideal reverse mortgage candidate profiles. The first profile was the homeowner with a free and clear home (or very nearly so) who doesn’t need the proceeds right now. Homeowners who fit this profile often use a reverse mortgage as a safety net to cover unexpected expenses and help protect and preserve other retirement assets so they last longer.
In this article, I will tackle the second ideal candidate profile: the homeowner who has a significant mortgage balance and many years before it’s paid off. Homeowners who fit this profile can use a reverse mortgage to eliminate their mortgage payments years (or decades) early, which improves their retirement lifestyle and financial security.
Introducing Mrs. Miller
To show you how this works, let me introduce you to Mrs. Miller, who was a case study subject in a book I recently wrote about the HECM reverse mortgage. Mrs. Miller is not a real person, but the case study is based on real-life scenarios.
Mrs. Miller is 75, a widow, and has a mortgage principal and interest payment of $1,127. Her sole income is Social Security, which totals $1,540 per month. She can’t live on her retirement income alone (for obvious reasons), so she supplements her income with withdrawals from her savings.
Mrs. Miller had a substantial savings balance when her husband passed away five years ago. Unfortunately, it has since dwindled to about $50,000 thanks to a rising cost of living, unexpected medical expenses, and a few odd home repairs. At the rate things are going, her savings will last at most another four years.
Throwing Good Money After Bad
Mrs. Miller’s mortgage is fixed at 5% with a balance of $184,685 and 23 years left before it’s paid off. With interest rates so low, why hasn’t Mrs. Miller refinanced for a lower mortgage payment? Unfortunately, she doesn’t qualify because her debt-to-income ratio is too high.
With 23 years left to pay, Mrs. Miller is fully aware her savings account won’t last nearly long enough to pay off the mortgage. Even if it did, she’ll be in her late 90s when the mortgage is finally paid off. Odds are the mortgage will outlast her, too.
Though Mrs. Miller has paid nearly $96,000 in payments since she took out her mortgage, the balance has only decreased by about $25,000. She’s draining her vital liquid reserves and barely putting a dent in the balance. She’s throwing good money after bad!
Mrs. Miller considered taking a part-time job to supplement her income and preserve her savings, but recent health issues have made that unworkable.
She could ask her children for help, but they have families and financial burdens, too. Besides, she prefers to remain financially independent and not rely on somebody else for her financial wellbeing.
Solving the Cash Flow Problem
Fortunately, Mrs. Miller’s home has appreciated to a value of around $400,000. With $50,000 in the bank and over $215,000 worth of home equity, Mrs. Miller has a substantial net worth – at least on paper. However, only $50,000 of her net worth is actually liquid. The rest is locked away in non-liquid home equity.
To Mrs. Miller’s luck, that’s where the reverse mortgage comes in. A reverse mortgage can help Mrs. Miller unlock her home equity and help make her financial situation more secure.
Based on her age and a home value of $400,000, Mrs. Miller qualifies for a reverse mortgage principal limit (the total proceeds) of $199,600. The principal limit is enough to cover Mrs. Miller’s outstanding mortgage balance, closing costs, and still leave her about $10,000 that can be added to her savings.
As long as Mrs. Miller lives in the home, pays the required property charges, and reasonably maintains the home, she won’t be required to make any mortgage payments ever again. She always remains the owner of the home and is free to leave it to her heirs, who will inherit any equity remaining in the home.
If the home isn’t worth enough to pay off the entire loan balance at the time of her passing, FHA will cover the shortage.
Granted, Mrs. Miller is not going to be taking world cruises on a monthly income of $1,540. However, she’s far more financially secure without the mortgage payment than with one. No longer will she need to drain her savings every month to pay the mortgage, which means her savings will last far longer.
An Ideal Reverse Mortgage Candidate
Mrs. Miller is an ideal reverse mortgage candidate because she had so many years left on her mortgage. It made no sense to drain her savings to pay a mortgage she likely will never pay off anyway.
Now that the mortgage payment is gone, Mrs. Miller is more financially secure and worries less about money. She now has more cash available to spend on more important things, including a few small home upgrades and her beloved grandchildren.
If you’re still paying mortgage on your home, have you checked your reverse mortgage options? What financial opportunities have you considered to make your funds more liquid? Have you met with an advisor competent in reverse mortgages? Let’s discuss in the comments below.