May 2016 — Real Estate & Home Builders Guide — Page 13E
Could reverse mortgage solve inancial trouble?
By Ilyce Glink
and Samuel J. Tamkin
Tribune Content Agency
Q
: In a recent column, you
provided advice to the
relative of an underemployed
person who owned a home free
of mortgage but was in inancial
distress with inconsistent cash
low and was falling in arrears
with their property taxes.
Wouldn’t a reverse mortgage
work here, providing a consis-
tent cash low? What would
be any possible downsides? Is
there a minimum age require-
ment for reverse mortgages
(since we don’t know the
person’s age but who is prob-
ably a senior citizen because the
mortgage is paid off)?
: Thank you for your
comment. We aren’t huge
fans of reverse mortgages,
though they can be useful in
some circumstances. Let’s walk
through the issue and see if a
A
reverse mortgage might work
here.
If we assume the person
seeking a reverse mortgage
was 62 years old (the minimum
age to get a reverse mortgage),
and owned the home outright
(or had a very small mortgage),
that person might qualify for a
reverse mortgage. But we’re not
sure that taking money from
the equity in the home to pay
for her housing expenses would
solve our reader’s problems,
and that is often the best use
for a reverse mortgage. For
that reason, we suggested that
our reader consider selling the
home.
While you are correct that
our reader didn’t have a mort-
gage on the home, our reader
appears to have accumulated
some debt over time due to
her inability to pay her living
expenses. So, the question is:
Would it be worthwhile to get
WHITNEY AND
ASSOCIATES
a reverse mortgage and use the
proceeds to pay off her debt
issues?
Since we don’t have exact
numbers, let’s walk through a
hypothetical situation. If we
assume the home was worth
around $100,000 and she had
about $10,000 in debt to pay off,
she might get about 50 percent
of the home’s value through
a reverse mortgage. She also
might have paid $5,000 or more
in fees to get that reverse mort-
gage (though this is generally
built into the loan). With this
scenario, she would take out
$50,000 and use $10,000 to pay
off her debt, leaving her with
$40,000 in cash.
We were also told that she
had accumulated the $10,000 in
debt over the prior few years,
so our reader with the reverse
mortgage could expect to run
out of money at the rate of her
expenses within the next 10
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or so years. That might have
kept her in the home, but at the
end of the 10 years she would
have blown through half her
equity in the home (assuming
that the home appreciated a bit,
but there’s interest tacked onto
the reverse mortgage) and she
would be around 75 years of
age.
We thought it might be better
for her to evaluate her living
situation and make a decision
to sell based on her current
income and expenses. What
happens if she lives to be 95?
If she eats up half her equity
but only gets 10 years out of
it, what will happen after that?
And, she’ll still have home
maintenance expenses, property
taxes and insurance premiums
to pay.
Instead, imagine she sells the
home and downsizes to some-
thing that’s more affordable
based on her project retirement
income. She could invest the
$100,000 she gets from the
home and use it for some extras
or for an emergency fund.
Given that the home seemed
to be her largest expense, we
thought it would be better for
her to look at alternative living
situations with the hope that
she might ind something to
her liking but at a much lower
monthly cost. At the same time,
she’d have any money she had
from the sale of the home in the
bank. Ilyce Glink is the creator
of an 18-part webinar+ebook
series called “The Intentional
Investor: How to be wildly
successful in real estate,” as
well as the author of many
books on real estate. She also
hosts the “Real Estate Minute,”
on her YouTube channel.
Samuel J. Tamkin is a Chica-
go-based real estate attorney.
Contact Ilyce and Sam through
her website, ThinkGlink.com
