What Boomers Should Know About
Reverse Mortgages For Mom And Dad
Financial planners say that baby boomers whose parents are considering a reverse mortgage should offer this advice: Break glass only in an emergency.
Although planners say that in limited situations a reverse mortgage can be a useful tool for maintaining quality of life, they qualify this assessment by adding that it should only be a measure of last resort.
A reverse mortgage is a home loan that lets a homeowner, age 62 or older, take a portion of the equity in the home in cash. No repayment is required until the borrower no longer uses the home as a principal residence. Reverse mortgages available through the U.S. Department of Housing and Urban Development are federally insured.
The use of reverse mortgages is on the rise, according to the National Reverse Mortgage Lenders Association, Washington. NRMLA cites HUD statistics that indicate home equity conversion mortgages from October 2003 through January 2004 totaled 8,700 loans, an increase of 76% over the same period ending January 2003 when loans totaled 4,948.
Population trends suggest those numbers could grow. The population of U.S. citizens age 60 and over is expected to grow to 82,501,033 in 2025 up from 44,158,531 in 1997, according to the U.S. Census Bureau. In 2025, that age group is expected to account for 24.6% of the population up from 16.5% in 1997, it continues.
NRMLA says this is a good thing. Where appropriate, a reverse mortgage can allow seniors to take care of their own needs and live comfortably and can ease concerns of their children, NRMLA says. It cites examples of people who have benefited from reverse mortgages, which have allowed them to accomplish everything from providing more income for daily living expenses to altering a home for a wheelchair-bound spouse.
But, financial planners say reverse mortgages are most appropriate for those who have no other assets than their homes. They add that for those who are considering a reverse mortgage to pay for medical expenses, it may be better to spend down and qualify for Medicaid.
In addition, they say, it could cause tension with boomer children who realize they will not inherit the full equity in a house.
It would truly have to be the last source for income because at the end of the day there is not anything left, says James Holtzman, a certified financial planner with Legend Financial Advisors, Pittsburgh. If a person is tapped out of resources, then it can be a viable option, he continues.
If a client had a financially comfortable relative who could buy the property as an investment and then rent it to them, that could be a better way to tap the value of that clients home, he says.
An even better solution, Holtzman continues, is to work with a client early enough so there is no need to take out a reverse mortgage. Helping a client to understand the need for long term care insurance or Medigap insurance can help prevent the financial need from developing, he explains.
Among the testimonials offered by NRMLA are several that cite use of the funds for quality of life purposes including buying a new motorized camper to travel.
But planners say a reverse mortgagewith costs that can run 6% of the equity that is tappedis a costly way to improve ones living standard.
The person taking out the mortgage might not see it, according to George Middleton, a financial advisor with Limoges Investment Management, P.C., Vancouver, Wash. But, when that person dies and the heirs have to pay off the mortgage, that is often when it becomes apparent, he adds. There is the potential among boomers who would have received the equity in the property to resent the loss of that inheritance, he says.
Andy Keeler, a certified financial planner in Dublin, Ohio, cites the expense as a reason for not recommending a reverse mortgage. He says a client accessing $100,000 in equity is looking at a $6,000 “haircut.” A better solution, he says, is for the boomers parent to take out a home equity loan or a home equity line of credit.
There are instances when a reverse mortgage can improve the quality of a persons life and can be an option if that individual is in good health and is not concerned about leaving an estate, says Bedda Emous, a certified financial planner with Fiduciary Solutions, LLC, North Andover, Mass.
However, she says that as a fee-only advisor, her mentality is “thou shalt not have debt when you retire.” So, she continues, she is wary of people assuming a reverse mortgage later in life.
Many parents of boomers have been careful with their resources all their life and have their homes paid, as well as income from Social Security and defined pension plans, Emous adds. “That generation doesnt have Gucci-Pucci tastes,” she says. So, a reverse mortgage may not be necessary.
And, even if money is needed for medical expenses for one spouse, Emous offers a note of caution. The surviving spouse is often the wife and if there is a reverse mortgage, there is the danger she will not have a place to live, as well as the potential for loss of Social Security and pension benefits. So, if a reverse mortgage is being considered, these factors should be weighed, she says.
Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.