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Reverse mortagages just one option for easing cash crunch
Reverse mortgages are popular, but there may be more effective ways to get ahead of expenses
BY VIRGINIA MUNGER KAHN
Virginia Munger Kahn is a freelance writer.
In October 2003, 91-year-old Nancy Petrone faced a situation common among seniors. After living independently in St.James for eight years on her savings and Social Security income, her savings began to run out.
In such cases, many seniors turn to reverse mortgages to close the gap between their income and expenses. Reverse mortgages, available to individuals 62 or older, allow homeowners to convert a portion of the equity in their homes into cash.
But Petrone's son, Frank - the Huntington Town supervisor who's used to examining tight budgets - was concerned about the reverse mortgage's closing fees of more than $10,000. After consulting with the Long Island Housing Partnership in Hauppauge, the Petrones decided to go with a $100,000 home equity line of credit instead.
"We got a low promotional rate and there were no closing costs whatsoever," he said.
Every month, Nancy Petrone would draw down a bit of the credit line to help pay her expenses. While her interest charges ticked up as her borrowing grew, the Petrones calculated that the line of credit would last more than 10 years.
Nancy Petrone died in July, but her son doesn't regret her getting the line of credit. She was able to stay in her own home and the line of credit "gave her financial independence," Petrone said.
Consider all options
Many seniors today find themselves squeezed between rising costs and flat or slightly increasing pension and Social Security checks.
What can they do to ease the cash crunch?
Many continue to turn to reverse mortgages, which can generate from $11,000 to $20,000 in annual income, depending on one's age and the home's value. (The older one is, the more money available.)
In the 12 months ended October 2004, the issuance of federally insured reverse mortgages nationwide more than doubled, from 18,097 to 37,829, according to the National Reverse Mortgage Lenders Association in Washington, D.C. In the New York metropolitan area, reverse mortgages surged 55 percent, to 1,406 from 904 the previous year.
But financial counselors and elder-law attorneys caution that reverse mortgages, while increasingly popular, are not for everyone. Because of the closing costs, which can run up to $14,000 locally, it makes sense to do a reverse mortgage only if you plan to stay in your home for many years. (Closing costs include fees paid into a government-run insurance fund, title insurance, appraisal, bank and recording fees.)
Reverse mortgages also may not be the best alternative for younger retirees - people in their 60s. The money you get from a reverse mortgage at that age will not necessarily be enough to pay your expenses once you're in your late 70s or 80s, advisers caution.
"You need to really understand the reverse mortgage and seriously consider all your options," said Diane Patrizio, housing counseling program coordinator at Long Island Housing Services in Bohemia.
So what are your options for cutting cash outflow as well as for generating income?
The first step, experts say, is to make sure you have applied for all the property and local tax exemptions for which you're eligible. That means applying for Enhanced STAR, low-income senior citizen, veterans and other exemptions.
Enhanced STAR (which stands for School Tax Relief program) works by exempting the first $50,000 of a home's value from school property taxes.
In Nassau County, savings under the Enhanced STAR program average $1,760. In Suffolk, the average savings are $1,480. In New York City, where the property-tax burden is considerably lower, the average savings is $350, but seniors can qualify for city income tax cuts.
To qualify for Enhanced STAR, an individual must be 65 or older and have income of no more than $64,650 a year. Seniors also may qualify for a low-income senior citizen exemption, which applies to those with incomes of $32,400 or less and can knock as much as 50 percent off property and local taxes at the $24,000 income level.
"The higher the property tax burden, the bigger the savings," noted Harvey B. Levinson, chairman of the Nassau County Board of Assessors.
Terry Scheiner, a Port Washington attorney, points to one of her clients, an elderly woman in Sands Point, who would have paid $14,800 in property taxes last year without her Enhanced STAR and senior citizen tax exemptions. Instead, her property taxes totaled $6,880, Scheiner said, a savings of $7,950.
Medical savings
The next place to look when stemming the outflow of cash is your medical expenses.
For those with modest incomes, one of the easiest ways to substantially cut medical costs is to enroll in New York's Elderly Pharmaceutical Insurance Coverage (EPIC) program. The program is available to anyone 65 or older who does not have adequate drug coverage and who has annual an income that does not exceed $35,000 for an individual - or $50,000 for a couple. The lower the income, the bigger the benefit.
"The benefits can be very significant for people in low- income brackets," said Jeanette Grabie, co-chair of the Suffolk County Bar Association's elder law committee and a partner at Grabie & Grabie LLP in Smithtown. "Eight hundred dollars in pharmaceutical bills can go to under $100 for people in a low- income bracket," she noted.
Tammy Marrero, a registered nurse in Farmingville, enrolled her 85-year-old aunt in the program in June 2003, after she heard about it from a co-worker. Marrero filled out a simple form, got her aunt's discount card from the state, and is now seeing substantial discounts on her aunt's drugs.
She estimated her aunt was spending $200 to $300 a month on prescriptions before she got the card and now the same drugs cost less than $100.
"It's a big difference," Marrero said. "My aunt is lucky; she doesn't take many pills, but not having to spend most of her Social Security money on prescriptions is wonderful."
For those who need help financing home care, a home equity line of credit can be a good choice. That's because the line works like a credit card - you pay interest only when you borrow money. Interest rates currently average 5.15 percent on a $30,000 line of credit in the metropolitan area, and closing costs often are minimal or zero.
In general, lines of credit work best for short- to intermediate-term needs. "The older the senior and the shorter the time they'll need the money, the more viable a line of credit is," said Lynn Law, director of education and counseling at the Long Island Housing Partnership.
Seniors who face major home repair costs often consider reverse mortgages, but a better option generally is a loan from a local community development agency or help from one of several nonprofit organizations that provide such low-cost financing.
Home repair strategies
Agencies in some towns provide deferred interest loans that can be used for anything from a new roof or heating system to replacing a cesspool. The income qualifications for these loans, available under the Community Development Block Grant program, vary, depending on the town.
In Huntington, for example, deferred interest loans are available to individuals of any age with annual incomes of $29,850 or less and to couples with incomes of $34,100 or less.
In return for the repair money, a lien is placed on the house; then, when the house is sold, the community development agency gets its money back - with no interest.
For instance, Arie Wooten, 65, a retired mental health therapy aide, had extensive renovation done on her Huntington home in 2003, thanks to a deferred interest loan from the Huntington Community Development Agency. She got, among other things, a new roof, windows, siding, and a renovated kitchen and bath.
"It seemed like a good idea," she said. "You're using the equity in your home to live better."
And, unlike a reverse mortgage, there are no closing costs. "If all you need is money to fix up the house, we feel our program is better than a reverse mortgage," said Bruce Grant, deputy director of Huntington's CDA.
In the end, though, one of the most cost-effective ways to gain substantial income is also one of the most basic: downsizing from your single-family home and investing the difference. If you own a home that has appreciated substantially, you can sell your expensive house and buy something cheaper with lower taxes. You can then invest the difference to generate a stream of income.
If you're in a low tax bracket and you invest only in municipal bonds and high-quality corporate bonds, you can make 5 percent a year on your money, attorney Scheiner said. On a $250,000 nest egg, she noted, that can mean $12,500 a year in income.
RTG Consultants is a national approved reverse mortgage lender, please feel free to call with any questions at 1-888-973-8377.
Click now for your free reverse mortgage analysis
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RTG Consultants, LLC
202 Lonesome Pine Dr.
Longwood, FL 32779
Phone: 888.9REVERSE
Phone:(888.973.8377)
Local: 407.774.0112
Fax: 206.333.0112
Email: Contact Form
www.rtgconsultants.com
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