By Alison Stanton
Tap into ‘trapped equity’ with a reverse mortgage
Like other seniors, Louis van Tonder and his wife Terri New sometimes found it challenging to make ends meet.
The couple, who run a safari booking agency called African Safaris & Travel and a website, Adventure Travel Vacations, regularly experiences ebbs and flows in their business.
“Also, when I moved here from South Africa, I had three kids to support and put through college with out-of-state tuition fees, which really made a huge dent in any savings we had,” van Tonder says. “Then I went through a divorce before I met Terri, and then ultimately any money that I had left towards retirement was gone.”
To help alleviate their financial concerns, the Prescott couple decided to look into a reverse mortgage.
Earlier this year, van Tonder and New met with Michael Bennett, CRMS, broker and owner of Gilbert-based Park Grove Lending, LLC and applied for a reverse mortgage.
“We needed to have less pressure in our lives and we are naturally fun-loving people, and we wanted to create the opportunity to enjoy a more fun lifestyle without all of the pressure of a monthly mortgage,” van Tonder says.
Reverse Mortgage 101
As Bennett notes, he works with clients like van Tonder and New every day who are nearing retirement age but are short the money they need to comfortably live out their golden years.
“One big problem is that approximately 70 percent of the 10,000 seniors that are retiring every day in the United States have not saved enough money for retirement, meaning they will probably outlive their savings and be dependent on the government for their income,” Bennett says, adding that this is why he advocates people think about using their home equity to extend the reach of their savings.
“Unused equity in your home cannot help you pay for anything; it only makes you house-rich, but can leave you cash-poor,” Bennett explains.
At its simplest, Bennett says, a reverse mortgage is a product that was designed by Congress, is regulated by HUD, insured by the FHA and designed for senior borrowers with maximum flexibility and no required monthly payment.
In order to qualify for a reverse mortgage, Bennett says one of the applicants must be at least 62 years old; if a husband is 68 and a wife is 60, the couple can still apply for the program and still have the full protection. “The older you are, the more money you get out of a reverse mortgage and the younger you are, the less you get,” Bennett says. “In round terms, the maximum allowed amount is 75 percent of the home’s value and it is usually somewhat lower than that. It is age-dependent.”
Before applying for the reverse mortgage, which can be set up to provide income for a certain number of years like 5 or 10, Bennett says potential applicants have to go through an independent third-party counseling session via telephone, with a HUD-approved provider.
Benefits of reverse mortgages
“This type of loan can change peoples’ lives in the truest sense of the word,” Bennett says, adding that in addition to paying off an existing mortgage, many of his clients use a reverse mortgage to increase their available monthly income by paying off various debts. “They can take the proceeds and pay off credit card debt, a car loan and/or medical bills. If you need more income, this type of loan can provide that.”
Also, by accessing what Bennett refers to as the “trapped equity” in their home with a reverse mortgage, some people are able to extend the time before they start taking social security payments.
“You can start social security at 62, or delay it until 70, when you get the maximum amount,” he says. “If you get a reverse mortgage at age 62, you could convert this trapped equity into an income stream to help get eight years’ worth of income before you qualify for the max amount.”
By monetizing the equity in a home, Bennett says his clients have also been able to increase their flexibility in their financial and retirement planning. “Using a reverse mortgage for financial planning is one of the most overlooked strategies,” Bennett says.
For some people, reverse mortgages can provide them with the financial means to travel, go places they have never been before and/or enjoy life in other ways. “It can definitely help people to increase their lifestyles, but I always suggest that my clients have their other ‘financial security boxes’ checked first before they do this,” he says.
Common misconceptions about reverse mortgages
As someone who works with reverse mortgages on a daily basis, Bennett is very aware of the misconceptions about this type of loan.
For example, some people mistakenly believe that reverse mortgages are designed to harm seniors and their finances, or that they are only meant for people who are struggling with their finances.
“Reverse mortgages are actually designed to protect the senior population. It is an important retirement planning tool and must be considered in the overall holistic evaluation of the estate,” he says, adding that the fastest-growing group of people applying for reverse mortgages is individuals worth $2 million or more.
Bennett has also counseled clients who thought a reverse mortgage will strip them of the equity of the house and prevent them from leaving it to their children – and/or that the bank will end up owning the house.
“A reverse mortgage is just a mortgage. You maintain ownership of your home forever, and at no time does anyone else own the home,” Bennett says, adding that by monetizing the equity in the home as part of a retirement plan, parents may end up leaving an even bigger legacy to their children.
Reverse mortgages: helping to put peoples’ minds at ease
Looking back, van Tonder says he and his wife are definitely pleased with their decision to get a reverse mortgage with Bennett’s help. “I think if you have a retirement with a limited budget, you own a home and you want to leverage it for a better lifestyle, this is absolutely a fit for you,” van Tonder says.
“For us, in our conditions where we had really limited money coming in from our businesses and from social security, we would absolutely recommend it. We just want to be able to do more fun things and now we are able to.”
For more information about Park Grove Lending and/or to contact Michael Bennett, call 480-227-3238, email him at firstname.lastname@example.org or visit parkgrovelending.com.