Alan D. Feller, Esq.
Reverse Mortgages and Home Equity Issues For Seniors
Problems arise when cash flow does not match or exceed expenses. For seniors, relying on Social Security and a small pension to fund their lifestyles in New York is a tall order. Add in the costs of home ownership then the risk of outliving one’s money is real. If savings and investment accounts are insufficient then other available resources may need to be tapped. For those seniors fortunate enough to own a home that has increased in value over decades there is some hope.
The equity value of a home (usually computed as the market value subtracted by any outstanding loan obligations attached to the property) can be partially converted to money without a sale through Home Equity Lines Of Credit (HELOC) or Reverse Mortgages. Both are specialized loans with advantages and disadvantages depending on the borrower.
Eligibility for HELOC loans still depend on the borrower’s work and credit history. Reverse Mortgages are tied to the property itself, if the borrower is over 62 and the home is their primary residence. A major difference between the loan options is that HELOC loans are paid back with interest-only payments for the first 10 years and principal with interest for the remaining years. Since Reverse Mortgages are not usually paid back until the borrower dies or the house is no longer their primary residence the interest is added to the principal. Reverse Mortgages also tend to have higher interest rates than HELOCs.
Reverse Mortgages can unlock a larger percentage of available home equity (up to 80% but usually less), but with the higher interest rates the odds of having substantial equity left over for heirs is limited. Also, while non-applying spouses may continue to reside in the reversed mortgaged property after the borrower dies, other living arrangements may not be honored.
For the senior who has limited available resources the type of loan will really depend on their actual circumstances. Listing expenses that are owed, calculating how much income is coming in and anticipating future expenditures and emergencies are intelligent steps to consider before deciding on a loan option. Reverse Mortgages have more value if there is very limited cash flow and very limited savings. Reverse Mortgage loans can be annuitized, provide cash flow and if structured correctly will not be considered income for Medicaid purposes.
HELOCs fit better with seniors who have slightly better cash flow (higher Social Security and pension payments) but may have smaller savings or investment portfolios. The line of credit can be used to pay for home repairs or other unanticipated expenses, as well as lifestyle purchases.
Owning a home in New York is expensive. The upkeep and the property taxes (even with the STAR Program) can put a strain on a senior’s finances. Creating financial flexibility with the use of a HELOC or Reverse Mortgage may allow a senior to remain in their home longer, avoid downsizing and provide some measure of security. Talk to the professionals at Sloan and Feller today to discuss home equity issues and estate planning.