INCREASING CASHFLOW Heals All Wounds

Are you or your parent(s) age 62 or older?  There is an expression called “CASH IS KING!”  During what I call “The COVID-19 era,” many employees and business owners have taken involuntary pay cuts.  This income-reduction is stressful and makes it difficult to pay bills as well as saving for retirement.  Unless you own a business, there are only so many ways to increase revenues and/or monthly income to generate more monthly cash flow.

            The older one gets, the more life becomes about making difficult decisions, and perhaps, having difficult and often emotional family conversations.  We ask ourselves questions like: Do I/we have enough money set aside for retirement?  Do mom and dad have enough money to stay in their home?  How do we finance long-term care?  If you have asked yourself these questions, perhaps you should consider looking into a reverse mortgage.  With a reverse mortgage, instead of you paying the bank every month, the bank pays you!  Also, because the money received is loan proceeds it’s tax-free*.

            Last week, we went in-depth on how to improve your FICO score and fix your credit.  FICO scores reflect your credit history among other factors. While not dependent upon a mere FICO score today a reverse mortgage borrower’s credit history is considered as part of the qualification process. Even at the height of the pandemic a record number of homeowners 62 and older are applying for the loan.  Not unlike life insurance the reverse mortgage is a misunderstood financial tool. I will go in-depth on life insurance in a future column.

            HOME EQUITY is the largest cache of savings for most households entering retirement; yet, it is typically the most underutilized retirement asset!  Reverse mortgages can help you enjoy greater financial flexibility, whether you are in retirement or still working if you are age 62 or older, should you qualify.  A reverse mortgage can help you; refinance existing mortgage debt eliminating the existing principal and interest payments, consolidate high-interest rate credit cards or student debt (to lower your monthly payments), make large cash purchases, fund home renovations, or pay for college etc.

            It is important to “know what you don’t know,” so I interviewed Bill D’Onofrio, a HECM (Home Equity Conversion Mortgage) loan specialist over lunch on Tuesday (Yes, I paid, LOL).  The first thing Bill told me is “Reverse Mortgages are no longer only for the needs-based borrower.  Many more affluent borrowers are seeing the benefit using home equity to fund a safe and secure retirement.  It is no longer about need; it is about efficiency and leverage.” 

            The top 5 REVERSE MORTAGE MYTHS mortgage are:

1. The Bank Will Own My Home: FALSE: Like any mortgage or home equity loan, you will continue to own your home with YOUR NAME on the title.  Keep in mind, you MUST meet your loan obligations: keeping current with property taxes, homeowner insurance, and any homeowner association (HOA) fees.  Private homes (1-4 Family) and some condominiums qualify; however, NOT CO-OP’s!
2. Reverse Mortgages Take Advantage of Retirees: FALSE: Reverse mortgages are designed to help retirees.  The biggest fear of ALL seniors is the “Fear of Living Too Long and Running Out of Money!” In some ways like an annuity, the reverse mortgage is designed to provide potential cashflow for life!  This industry is HIGHLY REGULATED to protect consumers.
3. I Will NOT Qualify Because I Already Have a Mortgage on My House or Condo: FALSE: Your home does not have to be paid off in full to qualify..  The proceeds from your reverse mortgage are first used first to pay off your existing mortgage.  You could then take the loan proceeds from the reverse mortgage in the form of tenure payments each month. Tenure payments are paid as long as at least one named borrower lives in the home as their primary residence and continues to meet the obligations of the loan.
   
   While reverse mortgages provide loan proceeds not income, an applicant’s monthly income is part of the qualification process to ensure borrowers have the financial capacity to meet the financial obligations of the loan such as paying property taxes or homeowner’s insurance. For example, in the Northeast, a couple must have a residual income of at least $906 per month,” said Bill.
   
4. I Will NOT Be Able to Leave My Home to My Heirs: FALSE: Your heirs can still inherit your home, but they must pay back the loan balance if they want to keep the house.  PLANNING OPPORTUNITY: In a situation where children don’t get along, or if one child has little money (meaning they need money now) and the others are affluent, I can envision selling the house at death, and using some (reverse mortgage) loan proceeds (while living) to buy a life insurance policy which the children can split on a TAX-FREE basis.  This way the decision is already made preventing “sibling bickering” which is not that uncommon.
   
5. A Reverse Mortgage is a Loan of Last Resort: FALSE: Many savvy homeowners use a reverse mortgage as an “emergency-fund” meaning that they do not need to receive payments right away.  COVID-19 certainly qualifies as an emergency!  Financial planning 101 says to keep 3-6 months of income in an emergency-fund.  I see this being suitable when one has strong home equity with either a limited or no pension and a small or no social security payment coming in. 

Reverse mortgages, like most annuities, can help borrowers set up a predictable cash flow stream.   My belief is that increasing your monthly cash flow can, over time, get you out of any bad financial situation hence, “CASH IS KING!”

To continue these discussions, Bill D’Onofrio (Queens-based) can be reached at: BDonofrio@reverselending.com.  As always, I can be reached at Rob@InsuranceDoctor.us.  Be Safe and KEEP THE FAITH!

* Always seek the advice of a tax professional.