June 17, 2016 by HECM Pro
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Fred and Gina Mason, both 79, live in Reno, Nevada and have been retired for a number of years. Fred was an insurance agent for over thirty years and Gina worked as a school teacher for a local private school. They enjoy spending time with their grandchildren and taking the occasional trip, but their budget is tight and they don’t have a lot of extra money at the end of the month.
The Masons decided to look into a reverse mortgage primarily to eliminate $23,000 in credit card debt they accumulated from income taxes. The interest rates on the credit cards are super high (as they usually are) and they are currently paying around $1,000 to $1,500 every month trying to get the cards paid down, but they aren’t making as much progress as they like.
Getting rid of the credit card payments altogether would be a huge relief.
In addition to the credit cards, their mortgage has a balance of $189,000, a principal and interest payment of $1079/month, and 24 years left before it’s paid off. Thanks to a good real estate market, their home has appreciated substantially and currently is worth $500,000.
Their income consists of $3,000 from Social Security and around $850/month (before taxes) from an IRA that has $150,000 remaining in it. Because they’re over the age of 70 1/2, they’re required to take distributions from the IRA, but they want to keep them to the minimum to help make sure their savings last the rest of their life.
Though their primary concern is the credit cards, the great news for the Masons is that a reverse mortgage can put them in a far better financial position than they might have initially expected – as we’ll see in a minute.
A Few Thoughts
Before we dig into this more, let me offer a few thoughts on the Masons’ financial situation:
- I have no idea why the they didn’t just withhold for taxes when they pulled money out of their IRA. Clearly they didn’t plan their withdrawals well, which is why they got hit with big income tax bills that got put on credit cards. With all the interest they’ve paid on the credit cards, those income taxes probably have cost them far more than what the IRS got paid. On top of that, the debt burden has limited their financial freedom and caused them a lot of stress.
- Because they have so many years left on their mortgage, it’s a good bet the Masons will never pay it off in this lifetime. With 24 years to go they’ll be centenarians before the loan balance drops to zero. Knowing that, does it really make sense for them to pay a mortgage payment anymore? If they’re likely to never pay off the mortgage in this lifetime, then probably not. They gain no financial benefit by making a mortgage payment for the rest of they life – especially if they never plan to sell the home.
- With $2,100 to $2,600 in total debt payments every month, they’re basically pulling hard-earned savings from their IRA to pay interest payments on their credit cards and mortgage. This is throwing good money after bad because their creditors are benefiting from their savings instead of them. Draining an IRA to pay credit cards and a mortgage makes little sense when they have better options.
- Because their budget is so tight, any unexpected expenses such as medical bills, home repairs, car repairs, etc., will have to be financed with even more credit card debt or by draining even more money out of the IRA. They are concerned about making sure their money lasts, so they want to pull as little money out of the IRA as they can.
With a reverse mortgage, they can eliminate some $2,100 to $2,600 in monthly bills, which gives them a lot of extra cash to do fun things and absorb unexpected expenses without dipping into the IRA any more than they have to. By minimizing the IRA withdrawals they also minimize their income taxes and help make sure their IRA lasts the rest of their lives.
What is a HECM Reverse Mortgage?
The HECM reverse mortgage program is designed to give seniors 62 years of age or older access to a large portion of their home value without having to take on a mortgage payment or give up ownership of the home. As long as required property charges (property taxes, homeowners insurance, HOA dues, etc.) are paid on time and the home is maintained as a primary residence, no monthly payments are required on any of the money borrowed and it doesn’t have to be paid back as long as at least one borrower is permanently living in the home.
The pool of cash available from a HECM reverse mortgage depends on home value, the age of the youngest borrower, prevailing interest rates, and what program (fixed-rate or variable-rate) is selected. This pool of cash is available tax free and can be used to pay off existing mortgages, other debts, or be allocated to monthly term or tenure payments, lump sum, or line of credit.
How Much Can Fred and Gina Get?
According to the reverse mortgage calculator, Fred and Gina qualify for a pool of cash worth $324,000. They have more than enough money available to pay off the mortgage and the credit cards, which eliminates $2,100 to $2,600 worth of monthly bills. They now get to live mortgage and credit card free, and it’s a good bet they’ll find some better things to spend that money on than interest payments to creditors.
After paying off the mortgage and credit cards, they still have $95,000 to $100,000 available on a line of credit that can be accessed tax free at any time. Even better, the line of credit will automatically grow larger over time. It accrues and compounds based on a certain growth rate, which works very similarly to interest. If they leave the line of credit untouched and it grows at a rate of 5% (which is reasonable for today’s market), in just ten years it will be worth in the neighborhood of $150,000 to $160,000. Instead of having just their IRA to live on, they now have an additional retirement asset (that’s tax free!) that can provide for their needs for many years into the future.
The reverse mortgage is an ideal solution for Fred and Gina. They didn’t work 40 or 50 years to stress over credit card and mortgage payments and have limited financial ability to enjoy their retirement. The reverse mortgage eliminated their stress, freed up a lot of cash for fun things, increased their liquid assets, and gave them peace of mind that their money would last them for many, many years into the future.
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