Using Reverse Mortgage to Supplement Income

On 11/1/10 8:23 PM, Njoracle wrote: (snipped - getting a reverse mortgage?)

I dislike the idea of a reverse mortgage. I'd say that at your wife's and your age, a downsize or move to a rental will make your lives easier. Is she comfortable with all the maintenance issues surrounding a house? Instead of the numbers you show, why not consider a downsize to a house worth $300,000? This would free up $275K or so. Put into an immediate annuity, it would get her $24,000/yr, far more than you could get on the $350,000 and avoid the snowballing interest cost. Joe

It would also reduce operating expenses for the house, reducing the pressure for income. Financially, downsizing is a double win for retirees, more money in the bank, less going out. -- Doug

The reverse mortgage is one of those very creative ideas the banks and others in the financial industry came up with in recent times -- you know, sort of like mortgage-backed securities.

Watch out Joe, you are beginning to sound like me. Seriously, well said.

There is another side to the advice to downsize in retirement. A lot of people would like to retain their larger homes and ample living space during retirement years. I would not want to move into a smaller house, if for no other reason than there would be not be room to put my "collections," -- all kinds of books, papers, CD's, DVD's, not to speak of sports equipment, stereos, computer accessories, etc. Without those things, increased cash flow in old age might be accompanied by emotional trauma and the steady decline often seen in retired people. Nowadays seniors want a more active retirement.

In olden times it was not unusual for people to live in the same house from the day they were born until the day they died. That is not common today, but perhaps an important goal of financial planning should be to accumulate enough money by the time of retirement so that downsizing would not be mandatory and it would be possible to continue with the same satisfying life style.

Two things that could have a big impact, that you didn't go into:

1. what is the plan for covering any long-term care needs?
2. what if anything would you like to leave behind for heirs/charities?

-Tad

I would think that, for a single retired person, a big house is more of a trouble than a pleasure.

Technology can help this. On a rather inexpensive 5 inch tablet, such as the 500 gigabyte ones made by Archos, you can fit an essentially infinite number of electronic books, papers, CD's, and DVD videos. You can output thru a stereo or big TV, but will find it surprisingly satisfying (maybe preferable) to view it handheld or listen while in your pocket. Furthermore it can hold a lifetime of photos and home movies, and also surf the internet.

I did a drastic retirement downsize and jettisoned about 80% of lifetime debris - it was a rather refreshing triage where you define what is important in your life. In my case it was a constructive move to a happier place once work constraints were thrown off. I guess many more "get used to the smell in the outhouse" and become complacent with what they're familiar with and who they know. For both those stay- at-home types and the wandering souls, I do agree that a physically active retirement is needed - the worst thing for your health is to take advantage of "relaxing time" and take an expressway to diabetes2 or whatever.

If I get it, the "reverse" aspect of it got named because instead of gradually paying off a mortgage, one is accumulating a mortgage. It is simply a loan. I'd never really looked at it before this. Instead of buying a house (gradually paying off a loan), one is selling a house (gradually accumulating a loan).

If taken in a cash lump sum, then that, plus interest, is the amount to be repaid (presumably on the sale of the house).

If it is negotiated as "monthly loan amounts received" then the amount due simply escalates each month, and interest due accumulates. (There are actuarial and insurance aspects to make sure lender doesn't get burned by those who live to 150. Interest rates on the regular monthly loan amount appear to be lower as the lender retains use of much of its funds, i.e. it does not lend the whole amount at once, but the actual rate of interest would be an interesting computation.)

For example, a home worth 600k (free and clear) is posted as security for a loan received in a stream of monthly payments estimated to last

The stream is not taxable, as it is money received as a loan, not "income." One might think of a reverse mortgage as a jumbo HELOC. To be consistent from a tax viewpoint, the interest accumulation should be tax deductible.

I'm not sure I understand it, but I somehow get the feeling the OP doesn't either, so I worked through what I could to try to help the analysis. An education process is *required by law* before signing anything.

Technology should help with the storage problem, but there are still those big TV screens, stereo speakers, computers, monitors, printers, scanners, keyboards, etc. And I didn't even mention all the various equipment my wife has around the house for her hobbies, which is more than mine. Then, there is the question of pets, which are important for many people. My two dogs simply would not tolerate less space, and my wife and I would give up those dogs and move into a "no pets allowed" apartment or condo when Hell freezes over.

LTC insurance is in force.

What ever is left when my wife dies goes to heirs

it appears that the amount available decreases as

Seems to me you got the picture right. The lump sum option is s fixed rate loan; the monthly option is treated as a series of loans at [rising] [LIBOR] rates, so the interest portion increases. There is also a line of credit option, if I read correctly.

The interest rate "play" also applies to buying a house today, committing to a 5% rate, expecting to take in higher than 5% a few years from now (e.g. laddered CDs or corporates). Rates are at historic lows (fact), and will probably rise.

I see nothing wrong with your analysis, but just want to stress that the reverse mortgage is in fact a loan. There are wrinkles to the remaining which should be flattened to ensure there's nothing hidden between them. E.g. The loan will likely be repaid from the sale of the house (which likely will appreciate over the next "?" years), but could be repaid from any funds (I believe). If the house appreciates substantially, a second reverse mortgage could be negotiated. Get hard numbers for the amount of interest due accumulated, and make sure that cannot exceed the estimated value of the house. The repayment will, I believe, reduce the taxable estate.

Hope that's useful.

Exactly my position.

Maybe it is available somewhere, I don't know, but if not, somebody should run the numbers comparing the cost of a reverse mortgage with that of a home equity loan or line of credit, taking into consideration the "hidden" advantages and disadvantages of each. My guess is that the reverse mortgage would actually correspond to a loan at a very high interest rate.

The more I think this over, the more it seems OK to me. With your realism and preferences, taking in the curent low rates to make them work in your favor, and (I think) reducing taxes, I don't see why not, if the loan can be repaid at any time without penalty should you or your wife decide later to move to an assisted living community to benefit from social activity.

I hesitate to differ with Joe and Skip, and I haven't studied details on reverse mortgages (possibly the ultimate ATM). On principle, I hate to borrow money because it pays a spread to the bank, but in this instance you describe, it seems like tax consequences may partially compensate for that spread, and when/if rates go higher, you might win on that as well.

Taking a lump sum would have worked very well 18 months ago, as stock market appreciation has been ~20%, or 6 months ago ~10%. Is it possible to do 50-50 lump sum and monthly? The rates should be much lower than a personal unsecured loan.

I hope I'm not wrong in thinking that a reverse mortgage does allow you to realize utility from your equity in your home, without moving out. The interest and consumption expenses are to your estate.

The primary market for reverse mortgages is retired folks with limited incomes. These are exactly the same people who would probably *not* be able to qualify for a substantial home equity loan or line of credit. They simply don't have the income available to make the payments.

No, a reverse mortgage is *not* a loan, in the sense that you never have to repay it during your lifetime, while you are living in the house. You won't care about your finances after you are dead, if you don't have a need to provide a payoff to any heirs. As the saying goes "You can't take it with you".

That is not needed - in the unlikely event that the proceeds from the final sale of the house are less than the outstanding balance of the reverse mortgage, the estate will still not owe anything to the mortgage company. The HUD insurance makes up the difference.

Fair enough. You mentioned investments producing $20K/yr. Given that at your wife's current age an immediate annuity would give a fixed 8%, is the sale of that asset able to produce more (a lot more?) than the $20K? Your interest in the reverse mortgage implies a willingness to give up assets in return for some income. This may be a way to do just that while preserving the house completely. Please understand, I'm not judging the decision to keep the house, just trying to offer my alternatives. This one does just that.

I am 48, in a house with a 12yr old, and rooms we rarely use (living room, dining room) and an eye on the downsize, by 1/3 to 1/2. Joe

Probably about $30K /yr. I wasn't anxious to consider that because there would be nothing left for the heirs when she dies.