In the state of California, an automobile can officially sport “vintage” license plates if 25 years have passed since it was manufactured. That “vintage” label can be considered a “classic” if the subject model shares some treasured attributes, such as chrome side trim, running boards or maybe a gleaming hood ornament.
In the world of senior citizens, classic takes on a completely different meaning, particularly when it comes to how this generation of Americans thinks about financial matters.
The cause isn’t rocket science, as they say. Humans tend to make decisions based on their prior experiences and the painful ones usually hold sway. Whether the subject is investments in stocks or bonds or even Reverse Mortgages, this group of citizens usually has a “classic” profile. They are mostly financially conservative to a fault, are risk averse, make decisions slowly and are selfless almost to a fault.
Not necessarily bad characteristics, but a “let’s wait and see” strategy can spell trouble for seniors when health issues loom that can freeze movement of finances if a living trust or power of attorney is not already in place.
And a subject that most classic seniors all have opinions about is the Reverse Mortgage. As the Reverse Mortgage industry matures (and it’s doing so at a high velocity), it’s bringing with it many welcome developments. New loan programs are being introduced and existing ones are improving. The stigma that once existed around this loan is dropping away as more is understood about how it works and what its legitimate applications are.
The improvements continue to produce one of the most highly disclosed loans available in the country. All the cards are up on the table. No hidden costs, and no extreme terms or conditions in small print at the bottom of the last page of the application.
Is this loan for every senior homeowner? Most certainly not. But the profile of the “usual” borrower has become broad and varied. The expected use by last resort borrowers
has given way to clients eager to start that home re-model project that always eluded them. Or funding dream vacations, or grandchildren’s college tuition, or paying for that
medical procedure not covered by insurance, or providing in-home care so the senior can remain where they are most comfortable and at peace.
The responsible and intelligent uses of this loan program are fascinating. Sometimes, Porsches find their way into borrower’s garages and vacation or rental properties become part of investment portfolios. Long term care policies are finally
afforded and written and hearing aids help spouses to once again recognize their mate’s voice.
Churches and charities find themselves receiving checks that would not have been possible without the funds made available by a Reverse Mortgage. And in many cases, a borrower just wants to remain in their home with-out making any additional mortgage And as described by a qualified financial planner, the tax-free loan proceeds can even be structured into a gift trust that can reduce the estate tax liability of a property when the
borrower passes on. The future will probably see the Reverse Mortgage as a common part of a diversified estate planning strategy.
The basics of the program are as follows:
Minimum applicable borrower (on title) age is 62+
Loan proceeds can be paid out in lump sum, monthly payments or held in a line of
credit for use as required.
The FHA program has lending limits that adjust by zip-code. A “Jumbo” program
is also available with no effective limits.
Pre-payment penalties do not exist and these loans can be retired at any time.
The loan becomes due and payable when the borrower(s) no longer occupies the
property as their primary residence.
The programs carry mandatory mortgage insurance which makes the loan a “nonrecourse”
transaction. Liability for loan repayment cannot exceed the property value and will not burden children or estate.
Title of the property remains in the borrower’s name.
Counseling (of borrowers) on the program is a required part of the process before
Borrower is responsible to keep property taxes and home owners insurance
current and in force.
An existing mortgage must be retired (and transferred into the Rev. Mort.) before
any cash out is made available to the borrower.
Income, assets / liability status, credit score or existing medical conditions are not
taken into consideration for loan approval.
Are Reverse Mortgage loan applications ever denied? Yes. A common reason is when an
existing mortgage is too large (for an applicant’s age) to permit qualification. The
programs tend to favor “older” seniors with medium size mortgages or “younger”
borrowers with little or no existing notes on their property.
Unfortunately, two other conditions frequently exist that can thwart a senior from using the loan. However, both have more to do with emotional or relational issues than loan details and logistics.
Sometimes, children may have an “entitlement” mentality that their parents (or
grandparents) respond to which can translate into seniors becoming reluctant to “mortgage” their intended heir’s inheritance. Given a senior’s programming to “hunker down and get by with less”, this subtle message from family members can weigh heavily on the greatest generation. Thankfully, most loving and supportive families are more interested in their parents having a comfortable retirement than receiving an inheritance.
And since the loans only make a portion of the property equity available to the borrower, it is intended to accomplish two important goals. One, freeing up tax-free proceeds, and two, simultaneously preserving home equity for the borrower to pass along to their family.
The other fly in this financial ointment can boil down to a simple matter of a senior home-owner not being able to give themselves permission to have a better life-style. Their predominant programming from decades of strife overwhelms the desires of their heart and they pass on an opportunity that could change their life.
And this occurrence is the single most disappointing part of my career as a Reverse Mortgage Consultant. The need may be clear. The desire is present. The family and friends are supportive and in agreement. The numbers work. But the senior’s head shakes slowly in response to the offer. It’s just not going to happen this time. Or probably ever.
And one is only left to wonder what changes could have been wrought, what lives could have been touched, if it weren’t for that inability to act “outside the box”.
So in the world of classic cars, it makes financial sense to preserve and restore the original lines and design of the machine. With classic seniors, you can do well to preserve and admire the original design, but look for opportunities to encourage appropriate change while respecting the patina of their years.
The material contained in this newsletter has been prepared by an independent third-party provider. The material provided is for informational and educational purposes only and should not be construed as investment, financial, real estate and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.
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