Should a Client with $1100 in Income Be Living in a 5,000 Sq Foot Home?
“Absolutely NOT” was my reaction when the advisor called me this week. They were looking into a traditional Reverse Mortgage. “No way”, I said, “You need to tell your client to consider moving”
Here are The FACTS:
- Clients Age (83)
- Widow for 30 years
- Homes Value – $400,000
- Mortgage Balance – $17,000
- Home Size: 5,000+ Square feet
- Notable Expenses: Home Owners Insurance $3500/yr, Taxes $5000/yr, Flood Ins $1,000/yr
- Client Income – $1,000 from Social Security
- Savings – $0
Discussion: The first things I asked the client was would she be open to moving, if she did not have to have a new monthly loan payment and could have considerably lower living cost and a greater savings to enjoy her retirement. ABSOLUTELY NOT!! End of Discussion was her answer!
So what are the options?
I am sure those reading this article can clearly see the obstacles. $1,100 a month income and $791 in property charges (Taxes and Insurances) So we have $308 left over to meet other living requirements. Food, Utilities, Maintenance, Upkeep, etc. This doesn’t look good!
What Can a Traditional HECM Reverse Mortgage Accomplish?
- Based on her age (83) and the estimated value of her home, she can establish a reverse mortgage benefit of around $265,000
- She can turn that into a $1,000 a month payment
- And Establish a $124,333 line of credit with a Cost of Living Adjustment of around 5%
- The Line of Credit is there for Emergencies, Expenses or Enjoyment
- Below is a Chart that outlines to Benefits to the Client
Additional Considerations and Benefits
So maybe it’s not so bad after all!
- Notice that the $1,000 Monthly Tenure Payment (Guaranteed for as long as she lives in the home) covers all property taxes and leaves her over $200 a month extra
- Now she has the whole $1,100 a month in Social Security to enjoy her retirement
- And she has a $124,000 line of credit with a build in cost of living adjustment (see growth pattern below) for Emergencies and Expenses
- Notice the last column entitled “Equity” This shows estimated equity remaining should the interest rates stay consistent and the home appreciates at 4% per year. (two things we cannot predict). But it gives you the picture.
This works for the client, and it actually could work pretty well.
But honestly, this would not have been my first consideration for her or her advisor.
Because on the surface, a single woman on $1,100 a month living in a 5000 square foot home really defies logic. But evidently so does the New HECM Reverse Mortgage. Here’s what my recommendation would be (if she had not screamed at me”I’m not going anywhere”)
My First Choice
- Sell the home for $400,000 (see info-graphic below)
- Pay the Realtor costs, Transfer Tax and pay off the Mortgage
- You would have $355,000 left over
- Use the HECM for Purchase to buy a new home in a gated community for $300,000
- Taxes are now $3,000 a year vs. $5,000
- Home Owners Insurance is $800 vs $3500
- There is No flood Insurance
- You have no Monthly Mortgage Payments
- No/Low Maintenance. No Yard work, shoveling snow, raking leaves. Newer appliance etc. (Worry Free Retirement)
- Total monthly property charges including HOA fee is around $400
- Client has $700 residual income
- And $246,293 left over to add to retirement savings
I like the second one because of the living scenario and long term benefit. No stairs, No maintenance and plenty of money to live on.
However, my role is to present the options to the advisor and their clients and start the conversation.
One thing is for sure, that client cannot live in that home for another winter without making some decisions.
Aren’t you glad that you understand how Housing Wealth can Benefit eveyone