New year, exciting new options in retirement financing

Laurie MacNaughton © 2019

His name is Richard, and his question to me was the following: “If my paid-off home is worth $900,000, why do I only qualify for some $220,000 in a lump sum with a reverse mortgage?”

Not only is this a great question, but it’s also a very common one. The answer, however, involves a few basics facts about how a reverse mortgage works.

First, the amount of equity homeowners qualify for is based upon age. More specifically, the loan amount is based upon the age of the youngest homeowner. Second, just like with any other home loan, a reverse mortgage is impacted by interest rates. And third, the amount one qualifies for differs according to the “flavor” of the reverse mortgage the homeowner selects – traditionally there have been two basic types, either a fixed rate or an adjustable rate.

Over the past few months, however, a plethora of other reverse mortgage offerings have come onto market. These loans, sometimes called “jumbo” reverse mortgages, are proving true game-changers for homeowners in higher-valued properties.

Which leads me to my conversation with Richard.

Richard initially enquired about a fixed-rate, FHA-insured reverse mortgage. Until very recently virtually all reverse mortgages were Home Equity Conversion Mortgages, or HECMs. But the HECMs are not always ideal for those in higher-valued homes.

Jumbo reverse mortgages are designed to meet needs of borrowers in homes valued up to $4,000,000. These non-FHA loans have some distinct advantages, with the most prominent being the following: at Richard’s age (78), he currently qualifies for some $430,000 at closing. Because he is looking to establish a special needs trust for an adult handicapped child, the larger amount available may better fit his goals. Second, closing costs on these loans are notably lower than those of an FHA-insured reverse mortgage. And third, at least one of these new offerings is available to homeowners aged 60 or older, rather than 62.

At the time of publication of this post, the new reverse mortgages were not yet available in Virginia as lines of credit. This means the full amount must be taken at closing.

Just like with other reverse mortgages, homeowners must continue to pay their property taxes, homeowners insurance, and other applicable property charges such as homeowners association fees or condominium dues.

I am the first person to say a reverse mortgage is not right for everyone. No one financial product is. However, a reverse mortgage can be an important addition to many homeowners’ long-term financial plans.

No one is likely to get by just on Social Security. Few will survive just on an IRA, a 401(k), or pension – or, for that matter, on a reverse mortgage. But when added together, all these contribute to financial soundness.

For more information about how a reverse mortgage may help with your retirement financing, give me a call. I always love hearing from you.

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Wait…what? Line of credit growth and reverse mortgage

Laurie MacNaughton | © 2018

There is was again, that same question: “Should we do a reverse mortgage now, or should we wait until our investments are gone?”

Turns out there is research on this – lots, in fact, some sponsored by retirement groups and some by academic institutions.

Regardless of the source, conclusions are consistent: homeowners who do a reverse mortgage early in retirement, while they still have healthy savings, benefit more than do those who wait until their finances are under stress.

This is largely due to two factors.

First is asset preservation during market downturns. Needless to say, the past few months have been a bumpy ride in the investment realm, and paper losses turn into real losses when you have to draw upon a 401(k) or other investments during a downtick. If you’re able to ride out a downturn you benefit financially in the long run.

Second is on account of what may be the most under-reported aspect of a reverse mortgage line of credit, namely the growth added to the unused funds in a reverse mortgage line of credit. If this causes you to say, “Wait…what?” it should, as this is something that does not exist with other types of home loans.

Here’s what this feature of an FHA-insured reverse mortgage means to you: each month a small amount gets added to the funds in your line of credit. This growth compounds over time, and it’s there for you to use when you need it. The growth is not based upon home appreciation, but rather upon prevailing interest rates. It’s counterintuitive, but if rates go up the line of credit actually grows more quickly.

What this tax-free growth may look like over time can be astounding. For illustration purposes let’s consider a husband and wife, both of whom are 68 years old, and whose paid-off home appraises for $400,000. If their line of credit at the time of closing contains about $168,000, in five years’ time it may have grown to over $206,000 – assuming interest rates remain steady. Again, growth is pegged to prevailing interest rates, and the line of credit grows more quickly if rates go up.

This line of credit can create a valuable hedge against having to sell investments in a down market. It can also create a safety net that forestalls the need to apply for Social Security before full retirement age.

Optimally, a reverse mortgage provides just one part of a long-range financial plan for retirement, because as life expectancies continue to increase, retirement is going to take more than your monthly Social Security check. It’s going to take more than a well-funded 401(k). In fact, it’s likely to take more than a pension, an annuity, an IRA, or a bank account – or a reverse mortgage – can provide. But when added together, these can combine to create a long-term means of maintaining financial wellbeing in retirement.

If you would like to discuss how a reverse mortgage might help your retirement plans, give me a call. I always love hearing from you.

 

Home for the holidays – mistletoe and red flags

Laurie MacNaughton © 2018

During the holiday season many of us will spend more face-to-face time with aging parents than we typically do. Consequently, in addition to the turkey, gifts, and mistletoe, this season can be a chance to spot common red flags that may indicate it’s time to talk with your parents about financial matters.

Deferred home maintenance, including items seemingly as small as dripping faucets or yard maintenance, may be an easily-spotted sign you may want to talk with your parents about their finances, because unaddressed upkeep is often a money issue.

Another sign of a looming financial issue can be a stack of unopened bills, especially if a parent has been ill. For many of us an avalanche of doctors’ bills can be scary, but if you’re living on a fixed income it can be paralyzing.

A third sign is evidence of new credit – either an equity line or new credit cards. This often serves as an indication there are ongoing cash flow problems.

Other, potentially more advanced red flags include a rash of strange phone calls, junk mail from debt-restructuring services, and late notices. Any one of these signs could indicate it’s time to have the “money talk” with parents – and like the other talk, it can be awkward. A good starting point for this conversation can be found on FINRA’s website at http://www.finra.org/investors/highlights/talk-aging-parents-about-money

As with most things in life, our parents’ financial matters can be handled in one of two ways: before there’s a crisis, or after a crisis has already occurred. If you would like to discuss how a reverse mortgage might help your parents with their financing needs in retirement, give me a call. I always love hearing from you.

For a printable list of red flags, click here: Printable checklist of red flags

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Don’t tell – our national aversion to discussing personal finance

Laurie MacNaughton © 2018

As I write this I’m visiting long-time friends in Germany. Over dinner the past few evenings our conversation has turned to retirement, as within the next decade both they and I will be approaching retirement age in our respective countries.

During our discussions a couple data points have piqued my interest, including the fact that though average Germans save more than average Americans do, a 2018 survey indicates they do not have appreciably more in retirement savings. According to the survey this is largely due to the fact median incomes in Germany are somewhat lower, and the cost of living higher, than in the States. When I asked my friends about their retirement funding they pointed to their daughter and said, half-jokingly, “She’s a big part of the plan.”

But here’s a personal observation: we Americans tend to speak of retirement finances with much more judgmentalism and a much greater degree of shame and secrecy. Did your 401(k) take a big hit after the financial crisis? Tsk-tsk. Have you not saved the recommended $1.5 million for retirement? For shame. Are you considering a reverse mortgage? Don’t tell friends or family – not now, not ever.

I see the impact of this attitude played out time and time again. A homeowner encounters an unexpected event – illness, loss of a spouse, loss of employment shortly before retirement, a later-in-life divorce – and suddenly needs access to a significant amount of funds. Because we Americans do not feel comfortable openly discussing finances, for many the only option is to look to their bank for a traditional home equity loan.

But here’s the thing: let’s say the homeowner qualifies for a traditional home equity loan. For the first 29 days after closing everything seems fine – cash need solved.

However, day 30 is the kicker because now there’s a mortgage payment due. And, for some homeowners this new loan payment is on top of an existing mortgage. Even if the homeowner can juggle payments over the near term, over the long term the situation can be a recipe for disaster.

So what are some potential alternatives? First, awkward as it may be, the homeowner needs to talk to family. They’re going to know sooner or later, and these conversations do not get easier over time – nor do financial situations typically get better over time. Over the years many adult children have told me they wish their parents had been more open in discussing financial matters.

Second, the homeowner should speak with a qualified financial planner, wealth manager, or elder law attorney who can help put together a long-range financial plan.

Third, the homeowner should consider using the home as a source of retirement funding. Several options exist here, including selling the home and downsizing, renting out a portion of the home, or doing a reverse mortgage.

Money is not a moral issue, though it can feel like one. Running short on money is not a sin, though we can be made to feel it’s one. And asking for help is not a weakness, though our culture may imply it’s one.

If you have questions about how a reverse mortgage may benefit your loved one, or if you would like contact information for elder law attorneys, financial planners, or wealth managers – or just about anyone associated with aging-related issues – give me a call. I always love hearing from you.

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The cost of bankrolling Mom

Laurie MacNaughton [NMLS ID #506562]

The topic under discussion was the cost of aging in America.

“How many here want to leave their kids an inheritance?” Nearly every hand went up.

“How many here are likely to have an inheritance to leave?” Not as many hands went up. In fact, not many hands went up, period.

The speaker, a Virginia Circuit Court judge, wasn’t asking these two questions of just any group; this was an assembly of some 200 attorneys, presumably a demographic with greater-than-average net worth.

As a reverse mortgage specialist, I would make this observation: not leaving kids an inheritance is one thing; having adult children bankroll parents as they age is another thing altogether. Zero inheritance looks great compared to adult children prematurely tapping their 401(k) so they can cover a parent’s medical bills. I know firsthand – I’ve been there.

According to a Pew Research study, more than forty percent of adult children with a parent aged 65 or older helped that parent financially within the past year. If percentages remain constant, the number of adult children bankrolling parents is likely to get worse, a lot worse, because by 2030 one in five Americans will be 65 or older.

This statistic becomes important when talking about reverse mortgage because, for many people, the go-to objection to is that the homeowner might not have equity left to leave the kids. But this is very flawed reasoning…on many counts. I’m going to point out just a couple.

First, current federal guidelines make it all but impossible for new reverse mortgages to deplete a home’s equity. But even if a homeowner were to use all available funds, this likely means there were no other funds to draw from – and that the reverse mortgage was a lifeline.

Second, an alternate scenario is that the parent does indeed have other funds but does not want to consume those funds, which presumably will go to the kids. Under either scenario the kids are the big beneficiaries. After all, every dollar of her own money mom can use to meet her financial needs is a dollar the adult kids do not pay out.

Of course, negative equity is by no means a foregone conclusion. There very well may be equity left for the kids. But is it true there might not be equity left for the kids? Yes. The pertinent issue is that the parent relieved the adult children from draining their own financial reserves – or at very least, the parent delayed the time the kids had to step in to help financially.

The critical nature of an aging parent’s financial decisions are likely to become ever more conspicuous as Gen X’ers themselves edge toward retirement and the solvency of Social Security runs low. Anything a parent can do to remain “self pay” throughout the retirement years is a blessing and gift to their heirs. And, thirty years’ worth of data shows that homeowners with reverse mortgages tend to enjoy significantly greater odds of financial survivability in retirement.

If you have questions about how a reverse mortgage may benefit your loved one, give me a call. I always love hearing from you.

 

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A little planning can be a big gift

Laurie MacNaughton © 2018

Charles, sweet-tempered and kindly, sat in my office fidgeting with a ballpoint pen.

“My mom has never really been herself since her fall, and I found out she was having money problems only after I came across a delinquency notice for her property taxes. By the time I opened her bills, she was late on everything – mortgage, taxes, utilities, you name it. I need to negotiate with creditors on her behalf but she never drew up a power of attorney, so now I’m not sure what my options are.”

In my role as a reverse mortgage lender I’ve met with hundreds of aging homeowners and their families. I’ve seen homeowners who have planed extensively for their retirement years, and I have seen homeowners who have done very little planning. I have seen couples who saved extensively, but because they have lived 25 years longer than anticipated, their savings are running out. And then there are the couples who did everything right, but because they were financially assisting a loved one, they depleted their savings much more quickly than they ever imagined. And that scenario can be a huge bummer.

Following are some basic preparations to make before a crisis arises.

The first step is to record administrative information on one master list. Include on this list:

  • The name of your banks and other financial institutions;
  • The name of your pension plan, life insurance plan, investment accounts, CDs, health savings accounts and the like, along with account numbers;
  • All income sources, including Social Security, annuities, veteran’s benefits and the like;
  • All financial obligations, including credit cards, mortgages, car payments, and utilities, along with the names of the utility providers;
  • Usernames and passwords for your online accounts;
  • Copies of driver’s licenses, social security cards, healthcare cards, birth certificates, divorce decrees, death certificates and the like;
  • The names of primary care physicians over the past 10 years. Current physicians may well be different than the ones used in years past, and it can become important to have contact information for previous doctors.

The second step is to meet with an attorney regarding the following documents:

  • Power of Attorney;
  • Will;
  • Advance medical directive;
  • HIPAA release.

If these documents already exist, make sure they’re up to date.

Once you have collected this information, put it in a safe and secure place – and let a responsible party know where the documents are. Preparation is only helpful when the right person knows how to find the information.

In a utopian world there would be no aging, sickness, disability, or financial hardship. But in this world that is our lot, a little planning can be the most loving gift you can give your heirs – not to mention the fact that planning ahead can save thousands of dollars in legal fees should adult children need to become a parent’s legal guardian.

If you would like to look into how an FHA-insured reverse mortgage might help with your family’s financial goals, give me a call. I always love hearing from you.

For a printable version of this checklist, click here: A little planning can be a big gift – checklist.

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No Crystal Ball

Laurie MacNaughton © 2018

“My mother’s home was paid off, and at the time we thought a home equity line was going to be the best way for her to pay medical bills. But at this point she’s 87 and the monthly payment is crushing her. Looking back, what we really needed was a crystal ball.”

If you have an older adult in your life, you’ve heard a similar story a hundred times.

No honest lender is ever going to tell you a reverse mortgage is a universally good fit: there are older homeowners for whom the time has come to sell their home and transition into other housing. Some are better served by doing a traditional home equity line of credit (also called a “forward” line of credit). And there are those who benefit from drawing down their investments.

But for homeowners who wish to stay at home and plan to leave their managed retirement accounts untouched as long as possible, or for those with Medicaid considerations, a reverse mortgage may be the perfect fit.

If you would like more information on how a reverse mortgage might help your loved one with financial needs in the retirement years, give me a call. I always love hearing from you.

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