Expert Column
Suzanne Wolfson, MBA, CFP 
Financial Planner for Retirement
Suzanne Wolfson, CFP® is the founder of For Retired Only™, a fee-based financial planning...read more
Articles In This Column
- Financial Planning Do's & Don'ts in Today’s Economic Crisis
- Financial Planning: What Those Professional Designations, Credentials & Titles Really Mean
- Who Can You Trust for Financial Advice?
- Advice for Seniors: Managing the Financial Market Turmoil & Economic Crisis
- Seniors: When is it Time to "Let Go" of Control?
- The Real Cost of Reverse Mortgages
- Fund Unexpected Elder Care Costs with Your Personal Resources
- Paying for Senior Care with the Inheritance
- Lessons I Learned after My Father’s Death
- Thinking of Selling Your House? Read this First!
- How Much Can You Save with Advance Planning?
- How to Pay for Long-term Care without Breaking the Bank
- What’s in Your Parent’s Wallet? (And What That Means for You)
- Financial Planning for the Elderly: Assisting Clients & Their Caregivers
- Financial Planning for the Elderly: a Personal Perspective
Financial Planning for Retirement
Comments For "The Real Cost of Reverse Mortgages"
What are the other alternatives for the seniors that are cheaper? Too many times pundits, bloggers, and other financial experts like to say that a reverse mortgage is expensive but lack the proof of other cheaper alternatives. This transaction is expensive compared to what? Please provide other solutions. Many seniors are on a fixed income and cannot qualify for any other types of loans or mortgages. Selling the house is an alternative. What are the cost breakdowns of thi stransaction? Start off with 6% to 7% realtor fees on the sale of the home then the costs of moving which can run upto $6,000 or more depending where you are moving to. Add the down payment on a new house(5 to 20 % plus which then takes away a seniors liquidty) and the closing costs ( which can run another 2 to 3 % or more depending on the sales price of the new home. So, a revers emortgage sounds pretty good when you start comparing the other alternative. So, what other alternatives are out there that are not expensive?
Suzanne,
I think your article has merit with the points that you raise. However, although you suggest there is a place for reverse mortgages, you also in my opinion, lose creditability when you suggest "the pushers of this product often prey on the poor, seizing their home equity in exchange for a pricey promise or dream:. If financial planners and CPA's would work together with a mortgage advisor, maybe we would have better success for the seniors.
Victor;
This is an important question. The first thing I always ask in this type of situation is what is the reason/need for accessing the equity? Is it for necessary home improvements?elder care? What kind of expenses need to be covered? Can your needs be met through any other government or agency deferred loans? (such as those available for home improvement or with property-tax deferral?) Does the lower fixed income allow for other benefits now or in the future? Do you want to pay off your low interest loan for additional funds at a much high cost as it is not deductible until pay-off time?
To fairly evaluate alternatives I would need to consider the person's total financial and personal parameters. Like all financial decisions, they can't be looked at in a vacuum. Everyone has different parameter and the options change with the markets. As I said in my article, Reverse Mortgages have a place and that is why they are amongst my tools when appropriate, but consumers should definitely look at the Annual Percentage Rate (APR) after tax for comparison and consider the expense of compounding interest on all the build up.... equity can spiral away.
You see the sale of the property as the only other alternative and, yes, that has costs of about 5-6% in commission and a bit more.... but a Reverse Mortgage can also cost 4-6% in loan costs just to initiate and then how much are you paying with compounded non-deductible interest?--with the mortgage insurance, on-going processing fees, and the payments you are not making? If you or your wife will never (Remember to stay realistic.) have a future financial need for the remaining equity as these loan balances grow fast nor have any legacy issues, then none of the costs matter. Ask yourself the "what if's", such as if later being you may be forced to sell the house because, for example, it becomes unsafe for you/your spouse or one/both of you needs help or medical care. I want you to consider the possible elder care costs, which are potentially huge, that everyone thinks will never happen to them. Selling the family home or moving someplace else due to care needs can be the hardest thing we do in our life as the house often holds comfort, memories, and a sense of security. Is quickly eating through your equity the trade-off you are willing to make for the benefit desired? Then it is okay as you are TRULY aware of cost!
Keep in mind that the available funds from such a loan can be significantly limited if you are under 75-80. Because of the credit crisis the criteria for equity lines, which in the past were significantly cheaper and could be structure as a reverse without the high costs, are now getting difficult to get or keep. This makes obtaining a Reverse Mortgage a more viable option depending on the person's AGE and needs if a large amount of funds is needed. I absolutely do believe that people have the right to benefit from their equity before it is too late.
Depending on the location, value of the property there is another new product (Equity Key and REX) available which SOMETIMES works if you are willing to give up 50% of future potential equity growth. These products also sound too good to be true, but also sometimes is the right fit.
There is also private financing available, if you know how to find the right resources, that would be willing to lend on a low-risk loan such as these are allowing you to create your own reverse at a lower cost. These can be a win-win for both the direct investor and the borrower.
Every financial choice and decision is different depending on the situation and all people involved. The important thing is that people understand the total cost and risks--not just the variable interest rate quoted, front-end fees, and benefits sold. People need to think how this can effects them 7, 10, and 15 years out?
During my 24 years as a Financial Planner I have seen many people be enticed by product benefits only to later on be shocked by what the true cost was and shocked by what they had agreed to. Often they will say they were not told. So you must be aware and know what you are really getting. A Financial Planner's job is to do the due diligence and assist clients in making important decisions that will meet the broader spectrum of needs, considering their parameters and objectives. We (Certified Financial Planners, CPAs and Registered Investment Adviser) have a legal responsibility to our client's best interest based on our knowledge, experience and technical evaluating tools. Our interest should not be about getting a commission for the company due to a sale.
Suzanne Wolfson
FOR RETIRED ONLY
If you have any further questions about your situation, please feel free to call me.
Suzanne
So what ARE other alternatives? Living on small pension+social security, at age 73. Taxes $10,000 year, and $700 payment on $85,000 equity loan. Are there gov't programs for homeowners who're not considered "destitute?" Very tempted to get say, $800 month income, are no longer make equity line payments. But I'm too old to do stupid things. Daughter concerned this isn't right. Sons would prefer I sell and downsize but NJ homes too costly. House value is $416,000.
Pls don't share my e-mail address. Thanks.
Monica,
Many sons and daughters are not familiar with Reverse Mortgages. One of the first thing that pops into their thought process is that the bank can take your home and they own it. This is just liek any other mortgage. If your children have a home and have amortgage on it does it mean that the bank owns therir home and can the bank take it away. The only way a bank can take your home is through a foreclosure and several things need to happen: If you do not maintain homeowners insurance on your home, If you do not pay your property taxes, and finally if you do not maintain your homee in good living conditions, these are the times that the bank can take your home on a reverse mortgage. Basically these are the same reasons that a bank can take your home on a normal forward mortgage. In addition, the banks can take a home away if payments are not made on aforward mortgage. I think your daughter needs to talk to a professional in the reverse mortgage industry to find out the facts. Decisons based on facts are good decisions. However, it is your home and you paid doen the mortgage. You have every right to do what you want and you are right it would be difficult to find a home in NJ that can fit your budget. I am sure it would be nice for you to have some cash reserves and no mortgage payment. Hope things work out for you. Have a great positive day! :)
Monica,
You need to talk to a Financial Planner who understands Reverse Mortgages and elder issues. I am a bit confused by some of the information you provided, but it seems you are struggling to make your monthly payment. And, yes, you can take out a Reverse Mortgage to help you with your payments or to downsize in order to reduce expenses. However as I do not know the details of your specific circumstances it is hard to tell her which direction to go. Remember, whatever decision you make needs to take into account possible future financial needs, such as additional costs which, for long-term care, can be quite high.
This exact issue is one of my concerns for people in your age range--I worry that too many people can end up spending all their resources, including their equity, which gets quickly eating up by a Reverse Mortgage as the loan balance grow with the compounding of costs. Then later on when they need funds for care, their choices can be very, very limited.
I would also suggest you call your local department on aging and inquire if they have any deferred property tax loan programs which could help your cash flow. You would only have to repay it after one's death or if the property is sold. That's a local option. Some cities and counties also offer low interest rate loans for necessary repair, which are also on a deferred basis.
Ms. Wolfson. My wife's father and his wife own a home (free and clear) in Providence, RI. My wife is according to his will, will be entitled to one half of the proceeds at his passing.(which includes the home). My question is, could her father take out a reverse mortgage on his paid for property and give her the proceeds with out penalty? The monies would be used to pay off her home loan.I do understand you can get a lump sum payout, but are there restrictions as to where the money goes?
Thanks,
Neil Smith
Neil;
I am a bit confused, but hopefully I understand that what you are suggesting is that your wife's father and step mother put a reverse mortgage on their home, pay your wife from the lump sum provision the present value of her future entitlement to pay off your wife's home loan? Acckk!
I have to tell you this does not settle well with me, because what if her father or his wife need expensive eldercare costs in the future (an uncertainty). Will there be enough of other assets to cover such an expense, which could cost $70,000 per year?
Not knowing her father's whole financial picture, I also have to be concerned about the estate or gifting issue as he is only able to gift $12,000 per year without possible implications. I am assuming the wished for funds exceed that.
Where the money goes from a Reverse Mortgage has only a few restrictions. Abuse issues of the elderly has been rampant with this product. Reverse Mortgages are very expensive money as I stated in my posting and really should not be used in this manner.
After having re-read your question several times, I hope other readers will also see what I do. Future interests in families estates are just that....FUTURE. If your father-in-law want to help his daughter, he should being doing so without having to jeopardize his home equity, himself or his wife. If he has other assets, maybe he should consider gifting some of those that have a high-cost basis to your wife, and ONLY if his present and future financial position is very, very secure. My concern here is that elders should not have to feel they have to jeopardize their own needs.
Suzanne
After many years of caring for my Mother at home, I'm about to place her in a memory care unit at Sunrise Senior Living. While discussing her financial needs, I was given a pamphlet by "elderlife" financial services. Have you heard of them and what are your thoughts? Thank you...
I checked out Elderlife financial services. Thanks for bring it to my attention as I need, and want to, know as much as possible about what is being sold to seniors and the caregivers.
Basically the company is a loan broker that provides short-term unsecured credit lines to senior with good credit and most likely some assets to secure it against (possibly even the children's). It offers these loan as financing to enable families to obtain care services (e.g., assisted living, nursing home care) when they are short on available cash.
The consideration is what is the cost of such funding. Here's the deal:
1.They imply they are there for the family all the way. (I think it's more a case of watching out for their money or lending more.)
2. Their interest rate is 4.99% (or 5%) points over the prime rate, which now makes 8.9% (or 9%). This type of interest presentation can appear deceptive to many consumers. There is also a loan fee.
The problem is most people are not aware of other sources of income or how to best use their financial resources. A person might not know that they qualify for Medicaid and/or VA benefits before they go to such high-cost extremes.
Sometimes if there is Real Estate there are other cheaper financing options, yet I can't deny it's a possible financial tool, but it is only useful in very specific circumstances.
I found that their website was written evasively, which would make most people call in for more information. That structure makes me uncomfortable. You should also note that these people are NOT qualified in any way as Financial Planners nor Registered Investment Advisers. Basically they are unsecured loan brokers to fund elder care. Of course, facilities will recommend them as a source, because if the elder can qualify for these loans, they can sell them their services.
I have asked for more specific information to be sent to me, so feel free to call me in the a week or so and I will be glad to share more of a specific opinion.
My mom owns home free and clear. She is 91 and lives in her home. I had to quit my job to take care of all her needs, driving, constant question answering and repetition, constant calls to reming her of meal times, etc, meal preparation, medical issues, medication control, all other personal, financial and social needs. In exchange for basically giving up my life to this (and, regretably my financial independence, after having been professionally employed 30 years,for the care of my mom), she is paying my bills. I owe total $100,000, including my HELOC and credit cards. Since this started 5 years ago, no additional debt has been incurred--only paying down the debt and monthly bills for both households from her retirement and social security. We barely scrape by and only dip into her savings (I had already used up all of mine when I started helping her and this evolved into a full time thing and then we made the arrangement) for extraordinary yearly things like taxes and homeowners insurance. I estimate a total in interest paid monthly is about $700 and it can be more if the rates go back up. I am her only heir. We were considering getting a reverse mortgage to pay off all the debt and stop paying this interest and also to have a back up line of credit should something happen medically to me, since I do not have medical insurance. But we are not sure if this would be wise based on the costs, etc. Her home is worth approx $400,000. I saw an article above about a man taking out a rev. mtg. to gift his daughter money etc. But I see this a bit different as I am basically my mother's dependent and caregiver and this would not be a gift , as we only have one source of money and in the end I am the sole heir. Would the cost of the rev. mtg be more or less than the savings of the interest in my debt? Can you advise? Thank you
Katia;
It is difficult to give you accurate advice even though you gave me a lot of information. I will merely try to give your some thoughts to consider:
1- Based on the information your provided you are paying about 8.5% interest on your $100,000 per year? The issue you need to confront is to compare the Reverse Mortgage Costs in total vs. what you are paying now after-tax. What would be the cost to obtain the Reverse Mortage funds, including the 2% front-end fees of the loan or credit line, monthly processing fees, interest rate (which is variable), also interest is NOT presently a deductible cost (at pay-off year), and the fact that your will be paying interest on interest (negative compounding which eats through equity quickly).
2- Do I understand that you live separately from your mother? You mentioned your HELOC Loan, what is its present status and cost?
3- You imply that because of the caregiving you are unable to work. You might want to consider maybe moving in with her and renting your house.
4- You mention that your are getting by barely, but only have to dip into your mother's saving for a few items a year. Saving? It sounds like you are working it out pretty well considering.
5- A reverse mortgage may feel like your payments are going away, but so too is the equity... QUICKLY. May be in the future you will need this option to fund more intensive eldercare costs. You might want to think of this optiona as an emergency fund if needed.
6- At your mother's age the amount the reverse mortage people will offer you will be high as the probability of continued payments for a long time will be actuarily low.
7- You do realize a Reverse Mortgage must be paid off at death or if you are forced to move your mother out of her home for a period of 6 months or more.
8- There may also the question of your mother mental capacity at that age to understand the ramification of signing loan documents and agreeing to such a financial arrangement.
Just a few items to think about. Without meeting you and knowing all the specifics, that's the best I can do.
My gut reaction say,...keep doing what you are.
I do understand the frustrations and demands of being a caregiver. Believe me,...looking back you will so value what you have done!
Suzanne
Is the best loan for seniors in the market today.
If you ckeck other types of loans they are as expensive as this one with the problem that you have to use your $ to pay it every month. For the case of elderly care assistant , get that care in your home do not permit to move you to a nursing home. If you move you will loose your home to that nursing home (that is the expense) no one takes care of the elderly for free, look for other alternatives beside nursing homes.( long term disability insurance or other) Your home will bring you more emotional stability and enjoyment untill you pass away.
There are other options out there for seniors to choose from. But yes I agree with everyone that if you really desire to keep and stay in your home for emotional purposes then a reverse mortgage should be an extremely viable option.
My 87 year old mother owns her home, worth about $150,000, free and clear. I was working but quit to care for her so she wouldn't have to go to a nursing home. She has Parkinson's Disease and other health problems that are chronic, but stable. She has been in a nursing home (short term stays) for physical therapy 3 times in the last year and the bills are adding up very quickly. The last time she entered one was because of weakness and, as it turned out, the weakness was because of her Parkinson's and she is now unable to stand or walk. We have a patient lift to make transfers safer and since her past stays were primarily because of transfer problems I feel that she may not have to enter into a nursing home as often as before, so her residing at home is no problem.
We try to pay down the debt but every time we start to make progress, something happens to her and we end up adding more to the debt, which right now is about $20,000 but climbing.
I am researching reverse mortgages and if she were to get one she would get a line of credt to pay off the medical bills and use the balance of her credit line as a financial "cushion"; there in case we need it but if we don't, it is there for peace of mind, and she doesn't have to worry about money.
Based on what I told you, is she a good candidate for a reverse mortgage?
Anita;
The reverse mortgage is a possibility, but you need to consider that if she needs or is placed again into a nursing home for over a 1 year period, that you must repay and probably sell the house. You need to consider in you evaluation of this type of product ALL COSTS! Being that the amount is low, the additional front end fees could be proportionately high. Also don' think that you will be able to gain access to all the equity as you will not be making payments and all theses costs will be built in and included in the compounding interest costs.
Sounds like you are trying hard to give her the best possible quality of life under very trying circumstances.
Get an estimate from a reverse mortgage broker of what they can offer (remember they are are sales people) and also consider the future possible needs and if you can really do this at her home.
Suzanne