While aging in place — including home maintenance, medical costs and property taxes — will be the primary reason for seniors’ tapping into home equity for decades to come, there are many other underestimated needs and wants that will quickly race to the front burner once a greater number of consumers better understand reverse mortgages.
In a recent column, we discussed the benefits of combining Social Security payments, securities portfolios and a reverse mortgage early into a retirement plan. By using the reverse mortgage to supplement the package during the life of the plan, researchers showed that a retiree’s residual net worth (portfolio plus home equity) after 30 years is about twice as likely to be greater when an active reverse mortgage strategy is used than when the reverse mortgage is used as a last resort.
A significant percentage of older homeowners, plus their children — the 79 million baby boomers who are now asking financial and lifestyle questions for their parents — will consider a reverse mortgage as a viable opportunity in their life.
Why? Older people primarily want to stay in their homes, and the cash in their primary residences can help them stay there so they don’t have to move to a retirement home. The bigger question becomes what happens if these huge groups do not stay in their homes or age in place? Where would we put them and how could we possibly fund such volume? Toss in the idea that people are living 30 years longer than they did 40 years ago and the potential shelter/care components become enormous.
More seniors are also figuring out that their kids have their own homes and don’t need the parents’ home. Those who do anticipate a child’s or grandchild’s need are acting sooner.
There are many people who took out a reverse mortgage for a specific use other than last-minute desperation.
For example, there’s a grandmother in the Georgetown neighborhood of Washington, D.C., who took out a reverse mortgage on her million-dollar home and gave her two daughters $200,000 apiece so that they could use the money now "when they needed if for their own children" instead of getting the cash later in her estate when the grandkids had grown and moved on.
Or, the senior living near Boston, widowed at a young age, who got a reverse mortgage to put her daughter through nursing school.
An Oregon man, still working at age 68, used the cash from a reverse mortgage to buy a flat-bed truck that would carry the long sticks of PVC pipe needed for his sprinkler business.
According to the U.S. Bureau of the Census and the National Center for Health statistics, 80 percent of the older population — persons 65 years of age and older — own their own homes and 73 percent are owned free and clear of any mortgages, amounting to nearly $1.9 trillion in home equity. The biggest concern now is that mom and dad have no equity left in their home because of the downturn in property values.
However, there are still prime reverse mortgage candidates who have lived in high-cost major metropolitan areas for decades who still have plenty of equity to access and need only a sliver of it to make their lives more comfortable.
For example, a woman who worked part time as a ticket-taker for the Seattle Mariners relished her position at the home-plate entry gate. However, like many seniors, she simply could not make ends meet on her monthly income, especially when it came time for a major purchase.
"I needed a car," she said. "I mean, I really needed a car. I had to have something reliable to get to work."
She got a reverse mortgage for $30,000, bought a good used car and also paid bills. The remainder of the cash remains in a line of credit that grows at a moderate interest rate. When a friend tried to poke fun at her for paying the seemingly high fees to get the $30,000, it didn’t bother her at all.
"I really didn’t care what it cost," the woman said. "I love what I do, and this was the only way I could see to continue doing it."
The maximum loan fee on reverse mortgages is 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. The fees seem too high to some, yet a bargain for others.
As the old saying goes, "You can tell somebody what something costs, but you never know what it is worth to them."