Those who profess a desire to remain in their homes as they age often think a reverse mortgage might be helpful. But two issues make reverse mortgages of doubtful value for many people.
Where the potential mortgagor wishes to leave a legacy to his or her family, a reverse mortgage may consume most of the potential value of the home that might otherwise benefit one’s heirs. Second, reverse mortgages typically let the mortgagee force sale of the mortgagor’s home if the mortgagor must move elsewhere to receive needed care. In the latter case, the reverse mortgage will have eaten up much of the equity in one’s home that could otherwise be used to pay for care in an assisted living or nursing care facility.
A recent case will illustrate an appropriate use of (and structure for) a reverse mortgage.
Our client is a professional woman in her late 70s, who we’ll call Victoria. She has no children and is estranged from her siblings and their families. The intended beneficiaries of her living trust are friends and colleagues who have no expectation of receiving a benefit on Victoria’s death.
Victoria desires to live in her East Bay home as long as possible. Given her circumstances, she fits the profile of a person for whom a reverse mortgage is appropriate, so she’s tested the reverse mortgage waters.
The prospective mortgagee has appraised Victoria’s home at $560,000. She has an outstanding first mortgage on which she owes $250,000 and a home equity line of credit with a balance of $50,000, both of which must be paid off in the process. Her debt service is currently $1,600 a month.
The mortgagee has offered Victoria two options—a lump sum payment of $110,000, or payments of $650 a month for life. She’s most interested in receiving monthly payments, but with interest rates currently so low, she cannot generate much monthly income from the lump sum she would receive without taking significant investment risk.
It’s important for anyone considering a reverse mortgage to realize that the lifetime payment option is, in fact, the purchase of a single-premium immediate annuity (SPIA). And the best advice for anyone considering an SPIA is to shop around, which is what we did. As a first cut, we looked at the SPIA quotes available online through Berkshire-Hathaway and Vanguard [see “Evaluating SPIAs,” Oct. 2009]. The Berkshire-Hathaway site generated a quote of $972 per month (http://www.brkdirect.com/spia/EZquote.asp). Vanguard quoted an almost identical $979 per month (http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote). Either of these options would provide considerably better monthly income for Victoria than the annuity offered by the reverse mortgage company.
But wait, there’s more!
One option available through the Vanguard site is the possibility of “rating up” Victoria’s annuity. As I mentioned in the October article, those purchasing SPIAs are typically healthier and prone to greater longevity than the general populace of any given age. Victoria has recently battled serious cancer, and while she appears to be cancer-free today, she certainly doesn’t fit the mold of one healthier than average for her age.
AIG Life Insurance, the insurer that actually issues the Vanguard annuities, and a few other insurance companies, will “rate up” an annuitant with significant health issues to a greater age, increasing the monthly benefit they’ll offer. The Vanguard site, for example, quotes a monthly benefit of $1,121 if Victoria’s annuity is “rated up” by three years, that is, if she is treated as being three years older than she actually is.
To determine whether Victoria’s SPIA will be rated up, she must submit medical records to the issuer for an underwriting decision. That process is now underway, and the decision should be made within two or three weeks. Because Victoria doesn’t have to commit to the SPIA until the rating up decision has been made, at the very worst, she’ll only have to pay the nominal cost of having copies of her medical records sent to the issuer.
Even without rating up, Victoria’s decision to shop for a better SPIA than that offered by the reverse mortgage company will generate more than $300 a month for life. And at the very least, Victoria will see an improvement of more than $2,500 a month in her cash flow as she receives almost $1,000 a month from her annuity and is relieved of the $1,600 a month she now pays on her mortgage and line of credit.
