Sometimes the proceeds from a reverse mortgage are not enough to pay off the existing mortgage obligations (which is a requirement). Many advisors and clients are tempted to dismiss the reverse mortgage at this point, but that could be an opportunity lost.
Something About Mary
Let’s take a look at Mary’s situation, and see what she and her advisor strategically chose to do. She is 67 with a $450,000 home and a $200,000 mortgage balance; her monthly payment is $1,750 a month.
A reverse mortgage makes $175,000 available to Mary, but her existing mortgage debts total $200,000. She has a shortfall of $25,000.
Four Options to Consider
Mary has several options to consider with her advisor.
(1) Pull the additional dollars needed from savings.
Mary has $300,000 in her investment account as well as money in cash equivalents, a small annuity she isn’t drawing from, and $50,000 of cash value in life insurance. She could choose the best account to draw $25,000 from, combine it with the HECM proceeds and pay off her current mortgage.
(2) Hope for better appraisal value.
Mary might consider getting an appraisal if she lives in a developing neighborhood where home values are increasing rapidly. The HECM appraisal will base her home value on how much similar homes went for in her area. Renovations are taken into consideration, but are not as influential on the appraisal price. If she believes the home will appraise for significantly more than the current estimate, it may be worth considering. The additional $25,000 in HECM proceeds may be made available to her, if the value increases enough.
(3) Wait and continue paying down the current mortgage.
This strategy depends on Mary’s age and outstanding mortgage. Here are some questions she might consider with her advisor: How old is Mary? How long will it take her to have at least 50% equity in her home? How much of a burden are her monthly payments right now? If it doesn’t seem likely she will be able to pay down her mortgage in a timely manner, she may want to move on to a different strategy.
(4) Consider moving.
If Mary is open to moving, she could sell her current home, pay off the mortgage and then use the existing proceeds combined with a new type of HECM (HECM for Purchase – H4P) to buy a less expensive home. Read more about the HECM for Purchase.
When Does It Make Sense to Pull from Savings?
Of the four options, I have found the first–pull from savings–to be the most commonly used. In fact, I’ve seen clients bring upwards of $100,000 to the table to get rid of their mandatory mortgage payments. But every case is different.
When does it make sense to employ this strategy? The answer lies mainly in how important it is to the clients’ longevity and lifestyle concerns to be free of the monthly mortgage payment. Is the payment…
- Causing significant emotional concern and worry?
- Prematurely draining retirement savings?
- Preventing funds from being used for other resources?
- Forcing clients to prematurely pull from an annuity?
- Keeping them from delaying Social Security?
- Inducing high credit card debt?
What you may discover is that clients who have the resources are more than willing to draw from those savings to rid themselves of the burden of having a monthly loan payment. In some cases, clients will choose to replenish the account from which they withdrew those funds. As a result, they continue to “make a payment,” but this time it’s back to the funds they used and not to the bank. In either scenario, there is flexibility.
(To run your clients’ scenario, use this calculator www.HECMCalculator.net)
In Mary’s case, she and her advisor decided it was worth pulling $25,000 from another asset to eliminate her monthly mortgage payments. They decided to use funds from her Cash/CDs/Money Market because those funds weren’t producing much growth, and the tax consequence was very small compared to the benefit.
Mary combined the $25,000 with the HECM proceeds of $175,000 to eliminate her $200,000 mortgage.
- No more mandatory monthly mortgage payments
- Significantly preserves her savings by reducing the draw on her portfolio
- Frees cash flow that she can put towards other retirement strategies
- Gains the peace of mind she desires
I know I don’t have to tell you about the heavy burden mortgage debt can place on those entering retirement. The widespread nature of this problem makes it one of the most common planning opportunities for advisors. Helping your clients access their Housing Wealth with the newly restructured reverse mortgage and pay off their current mortgage can give them the retirement lifestyle and security they’ve been hoping for.