I know. It's hard to think of using a reverse mortgage to help protect your estate when you're used to thinking of reverse mortgages with suspicion. After all, that's where unscrupulous, pushy people come to seniors' homes, browbeat them into signing papers and ultimately steal their houses out from under them, correct? Step into my world for a moment, and let's talk about the other kind of reverse mortgage. The one that the federal government created many years ago for homeowners 62 or older. The one that allows these homeowners to access the equity they have in their homes without ever having to make a payment until they no longer live in the home. The one that is filled with consumer safeguards, subject to federal law, insured by Housing and Urban Development and where no one is ever on the title to the home except the homeowner(s). Now that we're all on the same page...
One of the biggest challenges facing today's (and tomorrow's) retirees is having enough money to live comfortably during a retirement that may last 25 years or more. Property taxes and other costs of living all keep increasing, yet income during retirement usually either decreases or remains fixed. Our life spans are also increasing, which is wonderful, but trotting along right beside our expanded lease on life is the two-ton gorilla called health care costs. What if you're fortunate enough to enjoy good health, but the stock market starts to slide and the amount you can take out of your retirement portfolio dips down with it? What if you never put your house in a trust and your heirs spend a year or more waiting for your estate to wend its costly way through probate court until they can sell the home? Until recently, a reverse mortgage has primarily been viewed as a last resort to provide funds for equity-rich, cash-poor seniors. This is rapidly changing as baby boomers - along with their financial advisors and elder law attorneys - are utilizing them to manage wealth both before and during retirement.
A threat to any estate, however modest, is a nursing home stay or having to pay for in-home care. Typical in-home health care in our region averages approximately $20 per hour. Let's use a York County couple as an example, both 70 years old, whose house appraises at $350,000. Where would the money come from if one of them needed to recuperate at home from an illness such as a stroke? Without a comprehensive long term care (LTC) insurance policy, the funds to pay for such care typically come from a variety of sources: checking and savings accounts, retirement assets, often with help from other family members such as sons or daughters. If they had recently opened a reverse mortgage line of credit, they would have approximately $155,000 to dip into for just such an emergency. Of course, as my own parents do, they could use some of their reverse mortgage funds to pay for annual LTC insurance premiums and preserve even more of that $155,000. Since any unused amount in a reverse mortgage line of credit continues to grow, currently at 5.62 percent, $155,000 would give this couple approximately $9,000 annually in interest. That $9,000 could be used to fund annual LTC care insurance premiums and a trip to an elder law attorney's office to ensure that their entire estate is fully protected. My parents did both, as well as visit a financial planner who has helped them to make the most of their previously stagnating retirement portfolio. Without the reverse mortgage, it's unlikely that they would have taken any of these steps.
The federal government recognizes the value of using reverse mortgages to pay for LTC insurance: the federal legislature has considered waiving some of the mandated fees associated with a reverse mortgage if borrowers purchase LTC insurance with the proceeds. Many people, depending on age and insurability, purchase a last-to-die life insurance policy with a reverse mortgage, essentially using their reverse mortgage to purchase for their heirs the means to pay all or part of that same reverse mortgage when it matures.
And what about the stock market? Being forced to continue taking the same percentage out of your portfolio during downturns in the market may mean running out of money sooner. Drawing instead from reverse mortgage funds during those times can allow a portfolio time to recover before you resume withdrawing money from it. Conveniently, when you resume withdrawals from your portfolio, the reverse mortgage itself "recovers" due to the credit line growth factor.
There has been a new awareness regarding reverse mortgages lately, even in myself. A few years ago, I may have leaned towards "the older the better" when obtaining a reverse mortgage, because the older you are, the more money you are eligible for. Watching how my parents have utilized their reverse mortgage, however, and watching reverse mortgages evolve into a useful estate planning tool, has caused me to amend my previous thoughts. Why wait years for a couple thousand dollars more when you're young enough to enjoy traveling now rather than when you're 80, and the roof repair isn't waiting, and the new windows the house needs aren't waiting and the car you need to replace isn't getting any younger either? The couple thousand you waited for could have been saved on the other end by buying the LTC insurance when you were younger and it was less expensive. Simply having LTC insurance could save a great deal of future financial heartache for you and your family. Also, the purchase of a life insurance policy will be more affordable the younger and healthier you are.
There are many other uses for a reverse mortgage in estate planning, but I've reached my word limit for this article - plus I have a full day of brow-beating and arm twisting scheduled...
Nicole Waldron is a Reverse Mortgage Specialist with GIA Mortgage Corp. She lives in York with her husband and two daughters and may be reached at (866) 442-4245 or through www.nicolewaldron.com.
