Solano Real Estate Scene: Reverse mortgages can benefit for seniors
A home equity conversion mortgage is no longer only being used by seniors as a last resort or out of desperation.
Yes, a reverse mortgage can be a huge benefit for a senior to supplement their low income or a senior in dire need of a new roof or a senior who needs to pay off all their debts and their mortgage so they can stay in their home, but now across the country and right here in our community wealthy seniors are utilizing the home equity line of credit as part of their long-term retirement plan.
For example, here is a hypothetical scenario about a couple: Tom Magnum and Cathy Fonzarelli have been married 50 years. They own their $550,000 residence free and clear and are both 75 years old. They are in good health and have a little more than $1 million in their IRA rollover from his 401(k) and $50,000 cash in the credit union.
He was in private security for 40 years and she was a “Happy Days”-type domestic engineer devoted to taking care of her two kids, her husband, the family finances and her home. They have no debt, Social Security income of $2,500 per month and are taking a taxable monthly distribution of $6,000 from the IRA. They have great credit scores and have been very fortunate to have avoided any serious financial disasters in their lifetimes.
They need a new car, a new roof and they want to remodel their home, which hasn’t been significantly remodeled since it was built in 1968. The home has been maintained beautifully over the years but Grandpa, the kids and the grandkids want Grandma to finally have her dream kitchen. The cost for the car, the roof and the remodel will be $150,000.
Tom and Cathy decided to do a home equity conversion mortgage line of credit. They were eligible to obtain a line of credit for $250,000 and will only use $125,000 of the line for these needs, leaving $125,000 available for the future – just in case. They have no immediate plans to ever use this portion of the home equity conversion mortgage and the good news for them is that this unused portion of the line will grow annually until used.
Their daughter is an accountant and figures that based on an estimated growth rate of 5 percent per year, the line of credit will grow to $225,000 from $125,000 by the time they are 90 and would be available for special medical needs and all this up-front cash and future advances would be tax-free. Grandma and Grandpa will be able to remain in their home until whoever dies last or they move out. When they do die, the home will go to the kids via the family trust and all the kids must do is sell the house or refinance and pay off the balance due on the home equity conversion mortgage.
Finally, the other important factor for this family is risk. If Tom and Cathy take 100 percent of the available credit over the next few years and then in 10 or 15 years from now they die and the United States of America real estate market goes down the tubes and the balance due on the loan is more than the value of the home, the mortgage company and HUD will take the loss with no recourse against the family or the estate.