Financial experts who track such things report that there’s good news on the bankruptcy front: the rate of bankruptcy filings in the U.S. is on the decline. However, there are a still close to one million people filing each year, and a significant number of them are over age 65. Could it be that a reverse mortgage, or Home Equity Conversion Mortgage (HECM), might be the antidote to bankruptcy for many seniors?
We recently ran across this interesting article on the industry website Reverse Mortgage Daily. It quoted retirement expert Dirk Cotton whose analysis suggests that there are five major causes of elder bankruptcy: health expenses, credit card debt, loss of income (often from job loss or forced retirement), housing costs (property taxes, rising mortgage costs and foreclosure threats), and what Cotton calls “interconnected loss risk.” That refers to the idea which we discuss frequently here at AgingOptions that one retirement issue can compound another. “It is less likely that a household’s ruin will result from a single risk on this list than to multiple risks,” Cotton writes. “These losses might occur simultaneously and be unrelated, but it is more likely that one will cause another, which may cause even more.”
So what does that have to do with a reverse mortgage? Properly utilized, experts suggest an HECM can be the answer to each one of these problems faced by financially strapped seniors. And yet a huge majority still does not fully understand or appreciate how a reverse mortgage works.
First let’s consider the scope of the bankruptcy problem among seniors. According to the American Bankruptcy Institute, the total number of personal bankruptcies in the U.S. (including people of all ages) reached its peak in 2010 at 1.5 million. Since then, changes in bankruptcy laws have made it more difficult to have debts forgiven, which in turn contributes to a decline in total filings to about 935,000 by 2014. The Institute for Financial Literacy says that seniors (those over 65) represented almost 100,000 filings, or about 1 bankruptcy in 12 in 2009. That percentage has apparently continued to rise since then.
As we said above, there are five chief reasons for financial crisis among seniors, says Dirk Cotton who writes the financial blog The Retirement Café. In our experience every one – medical expenses, credit card debt, income loss, housing expenses and the blend of factors Cotton called interconnected loss – can potentially be alleviated through a combination of careful planning and the infusion of financial aid that can flow from a reverse mortgage.
We’ve seen a growing chorus of articles (such as this very recent report on Fox Business News) praising the HECM as an important financial tool to help seniors live more secure lives and avoid the catastrophe of bankruptcy. The Fox report is called “What seniors should know about reverse mortgages,” and while the information is fairly basic it still represents another affirmation of the power of an HECM. “Forget downsizing or migrating to warmer weather,” Fox Business News reports.” An overwhelming number (83 percent) of pre retirees and retirees today say they want to remain in their homes for as long as possible. That’s according to a new survey from The American College of Financial Services, and it confirms what other articles have said. “For seniors on a fixed income, a reverse mortgage can be a new source of retirement income and allow you to remain in your home for as long as you live,” says Fox. But here’s the real kicker: the number of seniors who still do not understand reverse mortgages is right up there at around 70 percent.
In the Fox Business News report, reverse mortgage consultant Meghan Keller answers the basic questions about the HECM. She explains, for example, that a reverse mortgage is a financial product through which a homeowner converts their home equity into an asset. The amount a homeowner can borrow depends on the age of the borrower, with a provision that allows older borrowers to tap into more of their home’s equity (HECM clients must be 62 or older). Keller adds that, “while there’s no perfect formula for determining how much you can get with a reverse mortgage, the rule of thumb is you’re eligible to convert 50 percent of your available equity as a reverse mortgage.” (You’ll definitely need to consult with a reverse mortgage expert to get more precise figures that reflect your specific situation.)
Thanks to federal rule changes in recent years, homeowners (or their heirs) will never owe more on a reverse mortgage than the value of the mortgaged property. If a home is worth less than the amount owed when the homeowner moves or dies, says Keller on Fox News, “the remaining obligation is paid by the Federal Housing Authority (FHA)” since all reverse mortgages are FHA-backed. Closing costs vary, Keller says: “Borrowers should expect to pay between $2,500 and $3,000, all of which can be rolled into the loan.”
Putting these two ideas together – the growing threat of senior bankruptcy and the general level of ignorance about reverse mortgage details and benefits – tells us that many seniors may be unaware of the financial relief that could be at their fingertips. We’re not suggesting that an HECM should take the place of proper planning and budgeting, and we recognize that reverse mortgages are not for everyone, but we strongly suggest that any senior eligible for one of these powerful financial tools should sit down with an objective expert such as Laura Kiel and get all your questions answered. You may be amazed at the financial freedom waiting for you.
Speaking of planning, at AgingOptions we hear all the time from seniors who have failed to make prudent decisions early on about their retirement. As a result they’re now finding it extremely difficult if not impossible to protect their assets and to avoid becoming a burden to those they love. Don’t let that happen to you! The common pitfalls of aging can be avoided with the right kind of preparation , and that means an AgingOptions LifePlan – a unique strategy that combines financial, medical, housing, legal and family elements into one seamless blueprint. If this kind of comprehensive approach piques your interest, we encourage you to invest a few hours of your time and attend one of our free LifePlanning Seminars, offered at locations throughout the area. Come get your retirement questions answered – we assure you you’ll enjoy the experience! For dates, times and locations, simply click here – then register online or call us during the week. Remember, AgingOptions is on your side!