The reasons why people do reverse mortgages may not always be obvious. Peter and Margaret owned a modest single family home in a middle class neighborhood north of Boston worth about $285,000. They were both retired, healthy, in their late 70s with a daughter and grandson living nearby. With social security, a modest pension and no mortgage, they were comfortable but had some credit card debt of about $10,000. They had always planned to leave the home to their daughter but soon the grandson would be entering his first year of college. The daughter was struggling just to make ends meet. They wanted to help.

Tuition would be about $30,000 per year so Peter and Margaret considered selling their home to provide money for the grandson’s education. Their attorney referred them to me to help them investigate other options such as a federally insured reverse mortgage. I have worked with several of this attorney’s clients over the years so she was comfortable referring them.

Calculating Options

Selling the home, we calculated, would leave them with about $261,000 net after real estate commissions of $17,100. Then, you could add moving costs and future storage costs for some of their household items. Also, they faced the prospect of locating a small apartment nearby where rent payments in the first year alone could be $12,000. Total outlay could easily exceed $35,000

On the other hand, a Home Equity Conversion Mortgage (HECM) on their existing home would yield them between $170,000 to $190,000 cash depending upon the specific HECM program they selected. Fees and closing costs ranged from a high of $13,500 to as low as $5,700… again, depending upon the HECM program they selected. No payments would be due until the last spouse left the home permanently. The only out-of-pocket cost would be the appraisal and the counseling; $425 and $125 respectively.

Decision: Reverse Mortgage

Peter and Margaret decided to remain in the home they loved so much and opted for the reverse mortgage. For them, even though the financial part of the decision would save many thousands of dollars in fees & costs… the real deciding factors were (1.) the realization that they could help their daughter and grandson immediately and (2.) still remain in their beloved home.  An added bonus was (3.) that there would be some extra cash available (over $40,000) to supplement their income if either needed medical attention or if one of them should pass away unexpectedly.

What choice would you have made? Peter and Margaret were certainly not desperate… and they clearly made a choice that cost them less money even though reverse mortgages are often inaccurately portrayed as “outrageously expensive”. In this case, the real estate commission was the expense far more deserving of that characterization. They thought it was an easy decision once the facts were known. They continue to live at home while their grandson benefits from their generosity and they are still around to witness his success. And yes, they agreed to cut up the credit cards and immediately paid off the looming $10,000 balance.

My Reward

Frankly, I see this kind of positive outcome almost every day in my business as a reverse mortgage specialist.  This is the reason why I do what I do.  I am always puzzled as to why some poorly informed people think the product is a “last resort”.  We aren’t dealing with widows and orphans here.  The vast majority of my clients are well informed and make very smart choices.

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant

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