What do you think it’s like to be in your late eighties, in declining health, without a dime in the bank, and facing foreclosure? I had the chance to find out when I chatted with a woman in this exact situation. Folks, I’ll tell you, it isn’t fun.
This woman, who we’ll call Norma, was 88, if I remember correctly. Her husband, who we’ll call Fred, was just a few years older.
Norma’s health wasn’t great, but she could mostly get around OK. Fred, on the other hand, was in bad shape. He could barely do the basics like eating and going to the bathroom on his own.
Fred’s health was in rapid decline and it fell to Norma to care for him. They didn’t have the money to hire professional care and they had no family living nearby.
Norma’s devotion to Fred’s care was incredibly inspiring to me, but I could tell that it was a huge burden on her.
As we chatted, I also learned that Norma and Fred’s finances were a complete disaster. They were buried under a heap of medical bills and had two mortgage payments. The main mortgage was a traditional 30-year fixed with a low rate and manageable payments. The second mortgage, however, was a home equity line of credit (HELOC). I always shudder when seniors on fixed incomes tell me they have a HELOC because I know what a ticking time bomb they can be. It didn’t surprise me when Norma said the payment had recently increased by hundreds of dollars and they were now struggling to pay it.
You see, the HELOC was now past the draw period, which usually lasts for the first ten years of the loan term. Fred and Norma were no longer allowed to draw on the available credit or make a low interest-only payment. Their lender had “recasted” the payment to force a complete payback of the balance over the remaining 15 years of the loan term. Their monthly payment on the HELOC was now triple what it used to be.
Norma and Fred were already on a tight budget. Their income hadn’t kept up with a rising cost of living, so they were already in a financial bind before the HELOC payment went up. There was no way they could afford the higher payment. Tragically, Norma and Fred were now facing the very real possibility of losing the home they had lived in and loved for decades.
Chatting with Norma that day, I discovered what it’s like to be in your late eighties, in poor health, dead broke, and facing foreclosure.
If you’re young and healthy, you have the time and energy to recover from big financial setbacks. But what was somebody in Norma’s situation going to do? She couldn’t get a job or start a business to make more money. She also couldn’t refinance to consolidate her mortgages because she had limited income and her credit was shot. Her family wasn’t coming to the rescue either; they lived far away and had limited financial resources themselves.
What options does somebody in Norma’s situation have? Unfortunately, not many.
Norma and Fred’s best bet was probably to sell the home, use the remaining equity to pay off their bills, and rent a cheap apartment somewhere. That’s probably not what they envisioned for their retirement, but what choice did they have?
I wish I could say there was a positive resolution to this story, but there was not. I tried to help Norma and Fred eliminate their mortgage payments with a reverse mortgage, but they didn’t qualify for enough to settle both loan balances.
The HECM reverse mortgage offers a portion of the home’s value based on age and current interest rates. Unfortunately, the amount of money available through the HECM was lower than what it would take to pay off both mortgages. Fred and Norma would have had to come up with cash to pay down their mortgage balance to make the HECM work. Obviously, that was not possible in their situation.
The HECM would have been ideal because it would have eliminated both mortgage payments for good. As long as they continued paying property taxes, homeowners insurance, and lived in the home, they would never have to worry about mortgage payments again.
Unfortunately, it was not to be.
A Few Important Lessons
Working with Fred and Norma revealed a few very important lessons that I want to pass on to you:
- HELOCs are highly risky if you’re on a fixed income. The more you borrow, the bigger the payment. HELOCs also usually have variable rates, which means your payment can increase if rates rise. And let’s not forget the recast, which can double or triple your payments. A HECM line of credit is a far better option. You have all the flexibility of the HELOC, but without the payment risk. No payments are required on a HECM line of credit as long as you live in the home and pay the required property charges.
- There will be a time in your life when you have no capacity to increase your income. You need to have your financial resources already in place before that time comes. Retirement assets, insurance (health, long-term care, etc.), and home equity (via the HECM) can all play a role in helping you be as financially secure in retirement as possible.
- Your expenses will likely increase substantially late in retirement as your health declines. You may need to pay for in-home care if you can’t take care of yourself. You may have a lot of medical bills to pay, even if you have Medicare and a decent supplemental policy.
- Mortgage payments in retirement can be very risky. Even if the payment is manageable at the start of your retirement, it won’t necessarily stay that way over the years or decades. Inflation will constantly erode the purchasing power of your income. Even if the mortgage payment itself never changes, your other living expenses likely will. You don’t want to end up in a situation where you’re choosing between paying for the mortgage or medical care that you need.
- It is important to have multiple financial resources at your disposal. Hopefully you retire with a free and clear home. If so, get a HECM line of credit early in retirement to serve as an additional cash source. Hopefully you don’t need the money right away, which means you can let it grow and compound larger based on a guaranteed growth rate. By the time you do need the money, you’ll have a lot more at your disposal. If you retire with a mortgage, consider using the HECM to get rid of the payment. You can then build your savings faster and position yourself to more easily absorb unexpected expenses and/or higher medical costs in the future.
- The best time to get a reverse mortgage is when you don’t already need it. It’s pretty hard to get insurance on a house that’s already burning down, right? Likewise, it’s often very hard to qualify for a reverse mortgage when you really, really need one. The best time to get a reverse mortgage is before you need it because your finances and credit are still in good shape. If the proverbial stuff has already hit the fan, you may not be able to qualify. Even if Fred and Norma had a lower mortgage balance, they still may not have been able to qualify because their credit was completely shot.
One Final Thought
A lot of people have this idea that a reverse mortgage is only a loan of last resort for people who desperately need it. I think the case of Norma and Fred disproves that notion. It’s not as easy to qualify for a reverse mortgage today as it used to be. Maybe the reverse mortgage was a loan of last resort in the past, but it’s not so today. If you’re seeking a reverse mortgage because you have no other options, it might already be too late.
I think the HECM reverse mortgage is better seen as a retirement planning tool that brings home equity into the retirement funding picture. No longer do you have to rely on just Social Security, pensions, and retirement accounts for your retirement income, you can now add home equity to the picture as well.
Have a great rest of your week and stay healthy out there!
This is an updated version of a post originally published December 10, 2018.