Some Thoughts About Senior Homeowners

As we grow older, our housing needs change. Throughout our lives, we may have been searching for more space, a larger home, more prestige, a better neighborhood or the best schools. At some point, our priorities shift and 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 some scenarios:

Perhaps the home is just too large. The kids are gone and you just don’t need that big rambler any more. Under these circumstances, selling the current home and purchasing a smaller home may be the way to go. This is often where emotions run rampant. Everywhere you look there are memories, and your memories are the greatest contributors to procrastination. 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. Ask yourself why you are selling, and then do it. Try to take a business approach if you can.

If the need is financial, you 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 an 8 percent return (good luck with that) and realize added income of $11,120 per year. That’s $927 per month.

That 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 need and pay the rent. If you find a nice little apartment for $700 a month, you will have $227 to supplement your income. Maybe that works for you, or maybe you’re saying, “You mean I gave up my home for $227?” While that might be exactly want you wanted, if not, there is another option.

Reverse mortgages are a means through which you can obtain some 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; it’s best to find a knowledgeable professional specializing in this type of loan. I can, however, give you a thumbnail description of the benefits and pitfalls.

Rather than the traditional form of mortgage where the bank lends you a large chunk of money and you make monthly payment 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. While you could come to the end of your payments, the calculations are designed to avoid that eventuality. Here’s a rough example of how it works:

You own your home free and clear and it is valued at $200,000. Based on your current age and actuarial tables, 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. It will be determined what monthly payment will be offered to you—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. Let’s say that your current income is sufficient to sustain you, but you don’t have enough left over to pay your 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. The reverse mortgage is a very flexible product and may be exactly what you need to live in comfort. One primary caution—watch the mortgage broker’s costs. Compare several estimates to make certain that you are not being overcharged.

The National Association of Realtors has developed a professional designation for realtors who 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 acquire knowledge and understanding of the special needs of this group. You can learn more on the SRES website www.seniorrealestate.com.

Gary Straub has been a real estate professional since 1970 and is a member of the Northwood Realty management team.