Saturday, July 2, 2011

Your Home: Is it Part of the Plan?

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners. And there is no doubt that this a good thing, a lesson learned that was far too painful but often, those tales are. But there is another game afoot in the world of mortgages, even as the largest lenders pull the plug on the process: the reverse mortgage.

Most of us don't envy those who are toying with this option. We know two things about these folks: one they own quite a bit of their house, referred to as equity and two, these homes are owned by cash-strapped people older than 62.

The reverse mortgage is a rather simple product with relatively simple goals. Because those who are considering this option are often older and in possession of much of the house they live in. This pool of cash is a very tempting option to a fixed income or one where retirement savings no longer is able to keep up with the cost of living. There are a variety of reasons they may need to tap this cash in their homes from medical bills to simply poor money management.

So the concept of tapping some of that equity is quite appealing. A reverse mortgage essentially gives you the money that your house is worth. Ron Lieber recently visited this topic in the New York Times explaining "reverse mortgages begin with a lender that is willing to pay you instead of you paying the bank. How much you get depends on your age, prevailing interest rates and the amount of equity you have in your home. The payout may also depend on whether you choose a lump sum, a line of credit, a regular payment for as long as you live or a regular payment for some fixed number of years."

The problem is getting a lender to do that. Many of the biggest banks have pulled away from offering the product, not because they don't think it is a good idea. But because those they lend the money to tend to fall behind on key elements of the loan agreement: paying taxes and keeping the house in sale-able condition. Aside from a check with the feds, there is no credit check on the applicants.

So banks, seeing the issue of foreclosing on granny because she opted for the lump sum payout and failed to keep current on those obligations have decided the bad PR will come with too steep a price. So enter the second and third tier lenders who will, without a doubt fill the void.

This could create several issues. The first would be fewer loans or on the flip side, loans that revert back to why this type of mortgage got its bad rep in the first place. Fees will be higher in a space with fewer competitors. Elderly will sign more complicated documents that will force them to maintain a fund for emergencies - which on the surface isn't a bad thing but could turn turn out to require higher funding balances than needed, leaving the reverse mortgager with less cash for the effort.

Another issue might be in how your heirs feel about the whole process. Often, parents,who may have mentored their children on the subject of money and financial prudence and who now find their finances in need of some review, may not be willing to or may be too embarrassed to ask for help. If there is no dialogue, the whole process might come as a surprise for kids who thought that house would eventually become part of the estate. And once these second and third tier lenders begin the process of foreclosing, it is often too late for the children to step in to help.

There are some key things to consider here. The first is what options do your parents have? Can they downsize? If not, can you talk to them about the options? Often this conversation needs to happen but it also needs to approached with great care and consideration. But once the barrier has been breached, you can move to include yourself in their financial affairs before it is too late.

This is also some tricky water to navigate. But the effort is worthwhile. If they need the money, and many older Americans will, attempt to get them to allow you to help budget the funds. In the future, HUD will probably set rules about creditworthiness and because many older Americans have little or no recent credit history, this might prove an obstacle at a time when they are already facing one too many. Helping them build some creditworthiness will enable them to be in a better position - with your help - to get the best deal possible.

Once you have gained their trust, you can include your input with their financial planners, with their attorneys and possibly with their medical doctors, all of whom may not be able to tell you what their clients or patients are deciding. You can take control of the vital payments that need to be made and keep things in good financial order.

So this summer, take a moment when visiting your parents or grandparents and have the discussion. And while you are at it, consider a plan to pay off your mortgage as well. (You can find recent articles about this topic here.)

Paul Petillo is the founder and managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer.

4 comments:

Tom D said...

Wow - what a biased, simple view of those who take out reverse mortgages.

Any vehicle can be used or abused. Reverse mortgages are no different. They have value if used in a prudent, conservative financial plan for lifetime income.

Here's a quote "There are a variety of reasons they may need to tap this cash in their homes from medical bills to simply poor money management."

What about those seniors who own their homes outright, have no heirs and want to increase the quality of their lifestyle using the equity in their homes to create a lifetime annuity?

I find this article demeaning toward seniors, assuming they are fragile and can't make reasonable financial decisions.

While there will always be seniors who DO need help, using that as the "going in" argument is sad.

If I were the parent of this author, I might well decide that I want the equity in my home to provide a better lifestyle with a lifetime annuity - my child certainly has no absolute right to it - a very personal and individual decision of MY assets - not theirs!

Retiring_with_a_Plan said...

My apologies Tom if it seemed demeaning. That wasn't the intent. Instead, it was meant to illustrate that the vast majority of seniors who do consider reverse mortgages ignore the high cost of the process, do so because they are looking for an increase in the quality of their life simply because they had failed to plan or outlived their plan or were left with widow/widower status that they were not expecting.

Your comment leads me to believe that you are neither senior nor parent but a sales person of sorts. What I'm suggesting is that a reverse mortgage is the last consideration. And if you are advocating for those who have no heirs, they probably should get the help of a very good financial planner who specializes in this sort of thing, someone who can be sure that this non-reversable financial decision be made with sound mind.

The payout for such move is smaller than most realize as well. And the statistics support the suggestion that when this decision is made, it is often for the wrong reasons and the wrong time.

If you are a parent, involve your kids. If you aren't a parent, involve your heirs. No heirs? Talk to the charity you want to leave everything to. My guess is each of these groups will talk you out of that decision.

Tom D said...

Actually, I am a senior and although retired early, have five years to go before I would hit that age of 62 where I would be eligible for a reverse mortgage. My wife is four years older, but we likely won't use this vehicle until later in our lives, when I'm 66 and qualify for full social security benefits. I'm definitely not a sales person, although have considered doing sales of this product as a second career since I see value in it for the right audience.

I consider myself astute financially and I'm not surprised that heirs and charities (both of which are in our living trust) would want to talk someone out of doing a reverse mortgage. It means more for us during our lifetime and less to them afterward.

Is the cost relatively high? Yes. But I believe that will continue to change to the better over time as the product becomes more mainstream. Regardless of that high cost, my personal decision is to improve my lifestyle with funds that would not be available to me otherwise - locked up in the equity of my home, lost for my enjoyment without this vehicle.

We are fortunate in that the equity in our home far exceeds the reverse mortgage maximums so that we can take the funds out and still have substantial equity available if we are forced (by illness or otherwise) to abandon the property prior to death of both of us. Those funds would allow us to fund a long term care facility above and beyond the reverse mortgage payoff.

I simply get tired of the media at large assuming that people are making bad decisions. Like I said in my original post, it is a tool to be used - good or bad - either can be accomplished. Used appropriately, it has tremendous value. Abused improperly, it can be certainly be problematic.

Reverse Mortgages have a dubious reputation because of abuses in the sales of the product as well as media coverage that is lopsided and biased. I never see fair coverage of this subject without bias - one way from the sales people and the other from financial "experts".

Thanks for the opportunity to rant.

Retiring_with_a_Plan said...

Tom,

You do sound like you have a plan and good for you! So few people do. I wish you luck.

And if I may add one more thing: as Boomers age, this product will become more mainstream and likely to become less expensive. And that I'm afraid, will create predators for those far less savvy.

Paul