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Money From Home
Too often, one of the unkind aspects of growing old is not having any money. You are up there somewhere in age, your retirement income is not enough to pay the bills, and though you may own your home free clear, you are broke.
(Forgive the use of "old" and "up there." I just turned 45, and I'm trying to write this article without using the term "senior," that awful euphemism for my approaching predicament.)
If you own your home free and cleat, you can't turn the house into cash unless you sell, and move -- and staying home matters a lot to most older folks, Oh, you can put a refinance mortgage on the house, but then you have to make mortgage payments out of the loan proceeds. If the loan proceeds get spent faster than you thought, you can wind up in worse trouble than when you were broke.
Mortgage engineers have for years been trying to figure out a way to turn equity into cash without requiring a sale, or payments.
The problem is tougher than it looks because the solution involves melding insurance concepts with banking long you are going to live. Bankers, cautious types that they are, don't like bets. Bankers don't want to win some and lose some, even if they win more than they lose: they want to win them all.
If a bank were to loan you your home equity now, and be repaid upon your demise by the proceeds from the sale of your house, the bank would have to guess the ultimate worth of your home, the cost of money to the bank during the time you had the money without making payments on it, and how long the bank would have to wait for you to pass into the great beyond.
Banks being banks, they figure your home value will go down over the next 30 years, the Fed will raise interest rates for 28 of the next 30 years, and that you, their customer, will double-cross them by living until three days past your 127th birthday
The normal bank conclusion after such an analysis is, if you will pledge your entire home to the bank, they will pay you $9.37 every month until you die. On such thinking has foundered every effort to turn equity into cash.
Until now.
Fannie Mae has a loan program insured by the Federal Housing Administration, which, under the right circumstances will turn equity into cash.
The original reverse mortgages were called "RAMs," for reverse annuity mortgage. These new ones are called HECMs. You can just see a bunch of hotshot federal marketing bureaucrats sitting around, trying to figure out a catchy name for this deal. One says, "Aw heck, I'm stumped," and "heckum" was born. HECM stands for "home equity conversion mortgage," not the handiest handle ever dreamed up.
The HECM has to deal with the risk factors that have always worried the bankers, and as a result, HECMs are insanely complicated. If you happen to hold doctorates in finance and computer programming, you may be able to figure out the real costs of the loans, and whether they are appropriate for you.
Basically, if you are 62 years old, or more, and own a single family detached home (no condos or townhouses) free and clear (or nearly so) you can get $250-$1,000 per month for life (depending on how old you are and what your house is worth), or get smaller monthly payments and open line of credit for $10,000 on which you can draw as you need.
To get the big monthly payments, you need to be really old.
Interest adds up only as you receive the money, but you have no payments to make, The total amount you owe when you die or sell the house is deducted from the sales price or end value, but the remaining equity is still yours or passes to your heirs.
There are other strategies for the elderly besides the HECM. If you have enough income to make a house payment, an ordinary refinance giving cash back to you is a much better deal than HECM.
Another, fancy idea: you can sell your house, and retain a "life estate," meaning that you keep the right to live in your home until you die. It takes a smart Realtor, and creative buyer, but it can be done.
A version of life estate is also available in estate planning, where, if your ungrateful kids amount to anything, you can begin to transfer ownership in your home to the next generation in exchange for some income.
The HECM appears to be appropriate for older folks who have no other resources or options. I say "appear" because scared away people who could really use the program: though 25,000 HECMs are authorized by Congress, various trial sales efforts have only found 3,400 borrowers since 1989.
There are only a few outlets for these loans in Colorado (our firm does not offer them, as yet), but to get Fannie Mae's neat, 84-page, incomprehensible guide to HECMs, write:
Fannie Mae
3900 Wisconsin Avenue, NW
Washington, D.C. 20077-4984
Attn: Consumer Education Group
And ask for HECM information: the booklet is title "Money From Home".
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