Beating a Dead Horse

By John Krajsa
AFC Reverse Mortgage

My wife sometimes accuses me of beating a dead horse when I argue a point. A few weeks ago we addressed the issue of how waiting too long to use a reverse mortgage can end up costing someone their home. (See our entry from July 5).

At the risk of beating a dead horse, here is another example. For the last several years the homeowners were paying their bills through a combination of social security and other income while drawing down on their savings. Their monthly expenses included a $700 mortgage payment.

When their savings were nearly exhausted, they decided to look into a reverse mortgage. It turned out that the amount they would qualify for in a reverse mortgage was about $7000 less than they owed on their mortgage, and they did not have enough savings left (or access to gift money) to make up the difference, so the reverse mortgage would not be possible.

Had they looked into a reverse mortgage a couple of years ago, they very likely would have had enough savings to make up the $7000 difference. A reverse mortgage would have eliminated their monthly mortgage payment, saving them 12 x $700 or $8,400 per year. They would have had that $7000 difference back in mortgage payment savings in less than a year.

Eliminating monthly mortgage payments with a reverse mortgage is a great way for retired homeowners to preserve cash flow. Had these homeowners gotten a reverse mortgage five years ago, by now they would have saved over $40,000 in mortgage payments. If a homeowner intends to eliminate mortgage payments with a reverse mortgage, doesn’t it make sense to do it sooner rather than later?

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Will a Reverse Mortgage Keep Me in My Home For Life ?

By John Krajsa
AFC Reverse Mortgage

None of us know if we can stay in our home for life. How long we will live, future costs and whether our future income will be sufficient cannot be known, regardless of whether we have a reverse mortgage. A reverse mortgage will always improve cash flow, either by eliminating a mortgage payment, or by providing additional cash, possibly both. If you continue to pay your real estate taxes and homeowner insurance and keep the home in reasonable shape, you can stay in your home as long as you choose. A reverse mortgage has no term or end date.

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What Is the Money Used For?

By John Krajsa
AFC Reverse Mortgage

The Bethlehem borrower in the PBS Report on our web page said she was “feeling the pinch” of living on a fixed income. By far and away, most borrowers use a reverse mortgage as an additional source of retirement income. A reverse mortgage can replace a conventional mortgage or home equity loan and eliminate mortgage payments. Whether used as additional income or to eliminate mortgage payments, a reverse mortgage always improves cash flow.

Some take an initial advance to buy a car or to pay some bills. Others take an advance each year to pay real estate taxes and/or homeowner insurance. The National Council on Aging “Use Your Home to Stay at Home” program suggests using reverse mortgage proceeds for home modifications, ramps and other necessary expenses so you can stay in your home longer.

Financial advisors are finding reverse mortgages useful as part of a strategy to accomplish a financial objective and/or to save taxes. It is an “additional pot of cash” that will enable a homeowner to stay financially independent for a longer time than would have otherwise been possible.

Finally, new since 2009 is use of a HECM reverse mortgage for home purchase. Homeowners age 62 and over, including those with limited income, can now use a reverse mortgage to finance the purchase of a new home. For example, a couple living in a $300,000 home with a $100,000 mortgage can sell their home and use some of the proceeds as a down payment on a new home. A $150,000 down payment matched with a $150,000 reverse mortgage could result in a likely more accessible $300,000 new home and no more mortgage payments.

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Generalizations Never Work

By John Krajsa
AFC Reverse Mortgage

In our last entry we pointed out that in today’s market reverse mortgages come in many shapes and sizes, and so it is difficult, if not impossible, to make a general statement that holds true for all. Many agree that not having to make monthly mortgage payments is a good thing. We know of two homeowners who took the words “last resort” literally and as a result are likely to have to move out of their homes. The facts in the two examples are similar; the numbers used here are to illustrate the case. Homeowners owe $160,000 on a traditional mortgage and would qualify for a reverse mortgage of $170,000 that could be used to pay off their conventional loan and eliminate their mortgage payments. They would also receive a check for $10,000, the amount remaining in the reverse mortgage proceeds after paying off their mortgage.

However, since the homeowners qualify for a home equity loan of $25,000, they decide to take that option. Two years later, they can no longer afford the payments on their conventional mortgage and home equity loan and decide to check out a reverse mortgage. They still qualify for a reverse mortgage of $170,000, but now owe $185,000. Since a reverse mortgage must be in first position and the reverse mortgage amount now leaves them $15,000 short of the funds needed to pay off their existing liens, a reverse mortgage is probably no longer possible. It would only work at this point if they have access to the $15,000 either in savings or as a gift from someone, or if they could convince the home equity loan lender to subordinate behind a reverse mortgage.

If none of those options are available and they cannot afford their mortgage payments, they will likely have to move out of their home. Had they gotten a reverse mortgage in the first instance instead of a home equity loan, they would have eliminated their mortgage payments, would have already saved two years worth of mortgage payments and would likely be able to remain in their home for some time to come. The moral of the story is that one size fits all general advice never works and homeowners who wait to use a reverse mortgage as a “last resort” may have waited too long.

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Last Resort? Why?

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage is a type of loan that is distinguishable from other loans primarily by the fact that no monthly mortgage payments are required. There was a time when there was one FHA program with one set of interest rates and fees. But that was years ago. Today rates and fees vary. Some have closing costs that are higher than other loans. Some do not. Many FHA insured reverse mortgages are offered with interest rates, for example, that are below the prime rate. In today’s market monthly adjustable rates in the neighborhood of 2% are frequently available. Today many homeowners are shocked not by the high cost but by how reasonable the cost is in many reverse mortgage programs. So, since there is no “they” regarding reverse mortgages, it makes no sense to make a generalization as to when “they” should be used. In our view, when and where a reverse mortgage makes sense can only be determined on a case by case basis. Telling homeowners when to use a reverse mortgage without any knowledge of their personal situation is not only a bad idea, but can in fact be harmful. See our blog entry next week.

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What is an FHA Insured Reverse Mortgage

By John Krajsa
AFC Reverse Mortgage

An FHA insured reverse mortgage, known as a Home Equity Conversion Mortgage or “HECM” is a reverse mortgage that is insured by the Federal Housing Administration, an agency of the Department of Housing and Urban Development. An insurance premium that goes to FHA is included in the loan. The HECM program was set up by the Federal government to help homeowners age 62 and over to stay in their homes. All HECM loans include an FHA insurance premium. The new “Saver” program offers less money in exchange for a lower FHA insurance premium.

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Who Should Consider a Reverse Mortgage

By John Krajsa
AFC Reverse Mortgage

A Federally insured HECM reverse mortgage is available to homeowners age 62 and over. It is intended as a loan for homeowners who plan to stay in their home over the long term, so is probably not appropriate for those planning to sell or move out in the near future. A reverse mortgage is used mostly by those who are equity rich and cash short and would like to tap the equity in their home. A reverse mortgage can have a dramatic effect on available cash. For example, homeowners eliminating a $2000 mortgage payment by getting a reverse mortgage would save $24000 a year, $240000 in 10 years and $480000 in 20 years in mortgage payments.

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What Kinds of Costs are Involved in a HECM

By John Krajsa
AFC Reverse Mortgage

Costs for a HECM reverse mortgage include normal closing costs such as title insurance, appraisal, credit report. Many have an up front FHA insurance premium, however the new “Saver” HECM loans do not. Most HECM loans also have an origination fee. In today’s market the origination fee varies depending on the program chosen. In recent months we have seen total HECM closing costs on a $200,000 house range from under $4000 to just over $10000, depending on the program chosen. Because of the protection of the FHA insurance, interest rates for monthly adjustable rate reverse mortgages have historically been below the prime rate, and today are in the neighborhood of 2%. Fixed rate reverse mortgages today are available at rates below 5%.

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What is a Reverse Mortgage

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage is simply a mortgage loan that does not require monthly mortgage payments. Being able to borrow money without having to make monthly mortgage payments greatly improves cash flow. For example, if a homeowner is paying $1000 in monthly mortgage payments and replaces that mortgage with a reverse mortgage, $1000 per month or $12000 per year or $120000 over ten years that would have been spent on mortgage payments can be saved or used for other purposes. A reverse mortgage does not have to be paid back until the homeowner moves out or the house is sold and so works best for homeowners who plan to stay in their home for the long haul.

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Choosing a Home Care Service

By John Krajsa
AFC Reverse Mortgage

Making the decision to hire a home care service to provide care for your loved one is an important decision and can, at the same time, be very difficult. If an illness or recovery from surgery requires nursing care or physical therapy, a physician may order skilled home care services that provide both skilled providers and personal aides. Your decision is then based on the obvious medical determinations made by the doctor. But what if you as the family caregiver must determine the extent of care needed without the help of a doctor?

Each home care situation is unique. In the beginning, family or friends step in to help with simple tasks and support for aging seniors who want to stay in their homes. As long term care needs progress, more time is required to manage those needs. Physical and mental conditions change with aging making usually routine hygiene and daily living activities difficult for an aging individual. Even with the healthiest of seniors, the ability to drive a car, shop for groceries or do general housekeeping eventually needs to be relinquished to the responsibility of another person.

In one example, Karen, would stop by her parents’ home on her way to work every morning and again on her way home from work in the evening. She checked in the morning to see that they were up and ready for the day and Karen would take a shopping list for things they needed. In the evening she delivered the needed items she had purchased during her lunch break and sometimes she fixed a meal when one was not prepared by her mother. This worked well until Karen began to notice her father did not shave or dress during the day and both parents were forgetting their medications. Karen felt more time and supervision was needed in their care but with her own family and job, she could not do it. Non-medical or personal home care services would be a good option for Karen to consider.

Before starting your search for a non-medical or personal home care company, determine what the care needs are and how much time each week will be required for assistance from the company. You may want to consult with the family physician and other family members as well as experienced social workers or care managers to determine needs. Most home care companies, as well, will help you do an assessment at no charge. With your care needs in hand, you are ready to begin your search.

The National Association for Home Care & Hospice (http://nahc.org/home.html) gives the following guidelines and checklist in searching for a home care company.

•  How long has this provider been serving the community?
•  Does this provider supply literature explaining its services, eligibility requirements, fees, and funding sources? Many providers furnish their home care clients with a detailed “Patient Bill of Rights” that outlines the rights and responsibilities of the providers, clients, and family caregivers alike.
•  How does this provider select and train its employees? Does it protect its workers with written personnel policies and malpractice insurance? Does it protect clients from theft or abuse by bonding its employees?
• Does this provider assign supervisors to oversee the quality of care clients are receiving in their homes? If so, how often do these individuals make visits? Who can the client and his or her family members call with questions or complaints? How does the company follow up on and resolve problems?
• What are the financial procedures of this provider? Does the provider furnish written statements explaining all of the costs and payment plan options associated with home care?
• What procedures does this provider have in place to handle emergencies? Are its caregivers available on notice?
• How does this provider ensure client confidentiality?

If a home care company has not previously been recommended to you, ask for a list of previous clients and call for their experience with this provider.

Following up on these guidelines can help you determine the quality of personal care that is given. Many states license non-medical home care companies and require both legal and health standards to be maintained.

Read about individual home care companies in your area on the National Care Planning Council’s website www.longtermcarelink.net

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