Reverse mortgage pitfalls: Going bankrupt is no fun. Just ask Art and Delores Johnson, of West Chester, PA. The senior couple couple both retired comfortably 10 years ago in this quaint suburb near Philadelphia, PA. Art retired with a modest pension and social security. His wife Delores was a stay home mom who successfully home schooled their five children. Two years ago the couple decided to do a reverse mortgage.
Surprisingly though it was not the reverse equity loan that nearly bankrupted them, instead it was mounting medical bills. The couple racked up more than $20,000 in medical expenses during a two year battle with cancer. The medical bills, costly home repairs, and a down stock market that ate much of their retirement money for lunch had Art and Delores experiencing their darkest days in what was supposed to be their golden years.
The silver lining
The couple was considering filing bankruptcy but Delores’s sister had done a reverse mortgage and suggested she and Art look into it. Art called me, 1-877-311-7383 (shameless plug), got his checklist together, and here’s what we discussed.
- Art was 73 and his wife was 72
- Fixed income of $1,700 per month
- Art and Delores have a $400,000 home
- $950 per month mortgage payment
- Only $100,000 remaining on the mortgage
- $20,000 in medical expenses
- $5,000 in needed home repairs
- A very serious need for a vacation; about $3,000
The math
Totaling the above numbers we arrived at $128,000 in cold hard cash that the reverse mortgage would need to provide in order to give some financial freedom to the couple. Anything left over would be gravy.
Funds provided by the reverse (check the glossary if you don’t know these terms)
- Gross funds available: $258,000
- Total Loan Cost: $16,160
- Service Set Aside: $4,509
- Mortgage Payoff: $100,000
- Net Funds Available: $137,331
- We arrive at this by subtracting all the cost from the Gross Funds Available $258,000 – $16,160 – $4,509 – $100,000 = $137,331
How this helps Art and Delores
- Current monthly mortgage payment of $950 goes away
- They can save this money, give it to the grand kids, or blow it in Vegas (what ever happens in Vegas..you know the rest) each month. It’s new found money in their pockets.
- Here’s something to make you go emm…what ever your mortgage payment is, how would your life be different if you could pocket that money each month.
- They can save this money, give it to the grand kids, or blow it in Vegas (what ever happens in Vegas..you know the rest) each month. It’s new found money in their pockets.
- From the $137,331 they will
- payoff medical expenses: $20,000
- make home repairs: $5,000
- Leaving them $112,331
Summary
The original question was can you go bankrupt with a reverse mortgage. I say no. There’s no payment requirement on the loan so the reverse won’t be the cause of it if you do. Further a reverse mortgage is a non-recourse loan meaning you nor your heirs can be forced to pay more back than the home is worth. With a HECM (FHA reverse mortgage program) borrowers are required to pay property taxes, carry hazard insurance, and keep the home in reasonable living condition. Do these three things and the bank is your friend.
Many of my clients do reverse mortgage to avoid going bankrupt. Most seniors I speak with still have mortgage payments. Because they are on fixed incomes making monthly mortgage payments can become increasingly difficult as the price of everything rises.
If this sounds like you, a loved one, or friend you can call me. I’ve setup a toll-free number 1-877-311-7383. You won’t be under any pressue or obligation and I’ll send you some free information in the mail, so call now.
Also look at a low rate variable mortgage refinance at 2.5%.