You Can't Eat Your House...or Can You?

06-06-2022

 

I have been a mortgage lender for 30 years now and believe me I have seen just about every scenario there is.  One scenario that is more common than not on our beautiful central coast is “house rich, cash poor” homeowners.  These are the homeowners that live in million dollars plus homes that have very little retirement income coming in.  Thanks to proposition 13, if they purchased their home a long time ago, they most likely have a pretty low property tax base.  Many of these homes are paid off or close to being paid off and have a tremendous amount of equity built up.  That all sounds great so far but what happens when the house needs a new roof and the bid comes in at $40k?  Or a paint job or a new kitchen, plumbing, or electric?  This is about the time we see our borrowers come to us looking for solutions. 

 

When we meet with them and go over their finances, we often see the following:

 

• Their home has 100’s, thousands if not millions of dollars in equity
• Their bank accounts and total investments total less than $40k
• Their income is limited to social security, a small pension, and some room rent on occasion

 

They feel rich until the reality of “you can’t eat your house” sets in.  I was told the definition of a millionaire is someone who acquires one million in assets……NOT counting their personal home.  Some of these borrowers are so strapped they cannot qualify for even a small loan for home repair.  Some no longer can afford to travel or even go out to dinner regularly.  Like the Gingerbread House in the story of Hansel and Gretel, they are sitting on all this equity and cannot touch it. 

 

Or maybe they can?  Enter the reverse mortgage.  This loan is not for everyone, however for certain borrowers with a particular set of circumstances it can truly be a lifesaver.  Our company has a loan officer dedicated to working with borrowers that can benefit from this type of mortgage. I would encourage you to meet with a professional reverse lender and do your homework on these loans, but don’t discount them as a “bad product” because I have personally witnessed this type of loan be the lifeline that can enhance a borrower's quality of life.  Additionally, this type of loan can even help a borrower purchase a home (not just refinance).

 

I will leave you with a personal story of a friend’s mom who lived in a one-million-dollar home with a $300k mortgage and a $2,100/month payment.  She had three children who she helped put through college as a house cleaner.  Instead of putting money aside for her retirement, she poured everything into her children.  These three kids all graduated college and went on to great careers and had wonderful, productive lives.  As their mom got older, she was no longer able to physically clean houses like she had done her whole life.  She did not have a pension or a 401k and very little Social Security Income.  She was struggling to make her house payment each month.  The family solution was that each of the three kids would pitch in $700/month to pay the mom’s house payment.  Fast forward a few years, the kids now had kids of their own getting ready for college and the $700 each was getting harder to help with each month.  We suggested they explore a reverse mortgage to defer the house payment and resume a better quality of life.  Yes, she added about $300k in principal to her original loan with this type of mortgage but the mom and her family’s quality of life went up and she no more struggled to make the payment.  Oh yeah, and the house today is worth almost $2.5 million ($1.2 million more after subtracting the increased reverse mortgage payments she added to the principal).

 

Just like Hansel and Gretel, she was able to overcome a difficult situation and come out on top.