Even tougher is the reality of hard math, with a reverse mortgage or without. This can lead to the second biggest mistake people make with reverse mortgages: they stay too long in a situation they can’t afford.
When a reverse mortgage is used not just to pay off an existing mortgage or to buy a new house, it makes a portion of the home equity available in a credit line. The amount in the credit line can grow, compounded monthly, increasing over time. But if that money is drawn down quickly, or there isn’t a large amount available from the start, spending can easily get ahead of the growth rate.
So, a $300,000 credit line for a person in his/her 80’s has a good chance to be enough money to last a lifetime. That same amount for a couple in their early 60’s may be enough if the money isn’t being drawn down aggressively or is maintained as a reserve fund. However, the less money in the credit line, the less it grows. When you get to zero, it doesn’t grow at all because there is no more left.
One of the roughest calls I get is when a client has used up her/his credit line and can’t pay the property taxes. This is a huge problem because keeping the property taxes current is a condition of the loan and failure to do so is a default which can result in the lender foreclosing.
So, how to avoid this mistake? When you set up your reverse mortgage, agree amongst yourselves to two things. (It is good to make this commitment with your financial advisor or adult children). First, you will make an annual review of your spending and what is still available in your credit line. Second, at a certain dollar amount in the credit line, it is time to sell the house and move.
The annual review allows for a long view of your spending and the impact of any unanticipated expenses. If adjustments need to be made, they might not have to be as dramatic as they would be at the point you decide there isn’t enough money left for the future.
That brings us to the second step, which is harder. Let’s say it is agreed that when the credit line gets down to $50,000 remaining available funds, it is time to sell the property and move on to your next stage in life. So, at the point you hit $80,000, you should take a hard look at how fast the money is going and what it is being spent on, so you can start planning a strategy for when you hit $50,000.
It may be a good time to pull in the family and advisors to help you in the conversation about your constant and optional expenses. The pace of withdrawals also needs to be looked at. I’m not implying blame here. Few if any of my clients are big time spenders in Vegas. It is just math.
What is important is to understand where financial pressures are coming from and what choices about your spending you have. This might also be an opportunity to start looking into what your home will sell for, what it will cost to sell, and the normal market time for a property in your area.
You could begin investigating what other housing options are available. Are you going to move in with one of the kids (maybe by building an in-law apartment), rent, buy a smaller place using a HECM for Purchase, or go into senior housing or assisted living? Again, there may be much to consider. Are there waiting lists? Will you be relocating out of the area? What can you take (fit)? What must be sold or distributed among family and friends or donated to charity?
This way, you will be prepared to make your move before you run out of money and options. As difficult as it might be to have to leave your domicile of so many years, it is worse to be foreclosed on and forced out with no money or control of the timing or other choices.
~~~ This blog has been as much about facing hard choices as it has been about mistakes with reverse mortgages. What are some of the hard choices you’ve dealt with in your retirement? I’d appreciate your sharing them as a comment.