29 Dec 2017
My client, Dora, lives with her adult son, Ivan, who has special needs. After Dora’s husband passed away, she was left to care for Ivan by herself. She had a good job in financial services and was always very careful to plan for her son’s needs. She set up life insurance and made arrangements for him to stay in the family home after she’s gone. Since retiring from her financial services job, Dora has generated some extra income with a part-time bookkeeping job.
Still, Dora noticed that her expenses were not being fully covered. She was also suffering from a heart condition and her doctor was urging her to undergo corrective surgery. She felt she really needed to get some additional financial security before going in for such a big operation.
So Dora took it upon herself to become better informed about how reverse mortgages work. She learned that she could borrow 45%-60% of her home’s value, up to a maximum value of $636,150. There are no monthly repayment installments. The simple rules to a reverse mortgage are that all borrowers must be 62 or older; live in the property as their primary residence; and pay the ongoing property taxes and home insurance. The income qualifications are also much easier than regular mortgages, as they’re designed to work with retirement income.
Reverse mortgage rates are competitive and the borrowed balance accrues interest for the amount of time it is borrowed. The full balance only comes due when the last borrower leaves the property, either by moving out or selling, or passing away.
Dora also learned the reverse mortgage program was created to help people convert locked equity to cash and leverage their house as a financial resource: for whatever the reason they need the money. Moreover, they are HUD-regulated, and FHA-insured.
As a former financial professional, Dora thought the program was a smart way to borrow against her own house. It would also provide her with some peace of mind. She could now fully afford her monthly expenses and the life insurance premiums to benefit her son, regardless of how her investments were performing in any given year.
Dora closed on her reverse mortgage about a year ago. She had asked to set up an automatic $2,000 a month deposit into her checking account to ensure her monthly expenses were covered. That still left a large line of credit in case of any emergencies.
Dora checked into the hospital for her heart surgery a month after closing. “It will be a couple of weeks,” she thought. “Maybe a month.” Due to complications with her surgery, she didn’t return home for three months. Ivan was scared being alone, but Dora’s friends checked in on him regularly, and he actually learned to be a bit more independent through this experience.
Dora’s bank account had indeed been operating on auto-pilot all the months she was in the hospital. Enough money was coming in and all the regular payments were going out on time. She was able to afford extra care to help with her recovery once she was back home. Dora always knew to plan ahead, but she never knew how much she would appreciate the security she set up for herself. She was able to focus on her recovery, and not worry about how to pay for it.