Senior Homeowners – Different Needs

As we grow older, our housing needs change markedly. While we may have been searching for more space, a larger home, more prestige and a better neighborhood throughout our lives, at some point our priorities shift and these things aren’t as important as they once were. We begin to concern ourselves with more manageable space and security, both from a safety as well as a financial perspective. Concerns about maintenance and costs become more acute. We become more interested in being able to provide ourselves with sensible, affordable housing and less interested in making a statement.

The changes are often profound and the options confusing. It can be an interesting time, full of adventure and hope, but there are pitfalls of which to be aware. Let’s consider a couple of scenarios.

Perhaps your home is just too large; the kids are grown and gone, and you don’t need that big rambler any more. Under these circumstances, selling your current home and purchasing a smaller home may be the way to go. Often emotions run rampant. Everywhere you look there are memories—and your memories are the greatest contributor to procrastination. You want to make the move, you need to make the move, but you just can’t make the move. How can you leave the home that has been such a part of you for so long? This is not a personal advice column, so I won’t get into the psychology of what’s happening here. I’ll just consider the practical; first ask yourself why you are selling, decide to do it and then do it. Try to take a business approach if you can.

If the need is financial, you really only make matters worse by delaying. In the past, most folks thought that the only way to improve their financial conditions was to sell their properties and invest the equity in some kind of investment that would return enough cash to supplement a usually fixed income. For instance, you sell your $150,000 home and after paying expenses (hopefully by this time there is no mortgage) you invest the $139,000 in something paying eight percent return and realize added income of $11,120 per year. That’s $927 per month, which doesn’t sound bad, until you consider that before you sold your home, you weren’t paying rent. Now that your house is gone that $927 must accomplish two things: provide the supplemental income you were looking for and pay the rent.

Let’s say you find a nice little apartment for $700 a month, leaving you $227 to supplement your income. Maybe that works for you, or maybe you are saying, “You mean I gave up my home for $227?” That might be exactly want you wanted, but if not, there is another option.

Reverse mortgages are a means through which you can obtain supplemental income and still remain in your home. Reverse mortgage calculations are complicated and are based upon several variables, so it isn’t possible for me to calculate your payment here – I suggest you find a knowledgeable professional specializing in this type of loan. I can, however, give you a description of the benefits and pitfalls.

The concept is really very simple: rather than the traditional form of mortgage where the bank lends you a large chunk of money and you make monthly payments to extinguish the debt, the reverse mortgage lender makes monthly payments to you and you are under no obligation to repay the loan, as long as you are alive and haven’t sold the house. Could you come to the end of your payments? Yes, but the calculations are designed to avoid that eventuality.

Let’s say you own your home free and clear and it is valued at $200,000. Based on your current age and actuarial tables and other dark stuff I don’t wish to get into here, it is determined that the lender will lend you 60 percent of your equity. So you have an account established for you worth $120,000. Based upon that same dark stuff, it will be determined what monthly payment will be offered. The more equity you have and the older you are at the time, the larger the monthly payment.

Further, it is possible to establish a line of credit so that you are not receiving any funds until you feel you need to take them, at which time you draw down on your balance. Say that your current income is sufficient to sustain you, but you don’t have enough left over to pay property taxes. By doing a reverse mortgage with the line of credit option, each year you will draw just enough to pay your taxes.

You may also have the option to take a combination of both monthly payments and a line of credit. Though the reverse mortgage is really a very flexible product, the one primary caution I would mention is to watch the mortgage broker’s costs. Compare several estimates to make certain you are not being overcharged.

It is important at this point to mention that the National Association of Realtors has developed a professional designation for realtors who would like to specialize in the housing needs of senior citizens. Realtors who have earned the Senior Real Estate Specialist (SRES) designation have committed to a course of study to understand the special needs of this group. Realtors who hold this designation can be located on the SRES Web site, www.seniorrealestate.com

Gary Straub is an independent real estate consultant who has been a real estate professional for 36 years.