Can a Reverse Mortgage Solve an Older Client’s Debt Problem?
How you can help an older client pay off credit card debt.
June 13, 2011
Anna is a 66-year-old retired single woman. Her only source of income is a $4,000 a month teacher’s pension. She owes credit card debt of $52,000. Concerned about his mother’s situation, her son hired his CPA to analyze her situation. He became concerned when she told him about taking out a reverse mortgage on her home. Before that, he had no idea she had such tremendous debt.
Anna had a modest amount of savings that she drew on each month to make ends meet and pay her credit card bills. The savings recently ran out and she is afraid that she will not be able to pay her minimum credit card bill and her other expenses. While she is current on her credit card debt, Anna fears that she will fall behind soon. She owns her own home valued at $200,000. The remaining mortgage is $65,000.
She is considering taking out a reverse mortgage. Since her ability to obtain a reverse mortgage does not depend on her credit score (which is low) or her monthly income, a reverse mortgage is a viable option (the bank refused to provide her with a home equity loan). But is it the best option?
The Reverse Mortgage
Four plans had been provided to Anna. The only one that would provide enough of a draw to pay off her credit card debt was the HECM (Home Equity Conversion Mortgages) Standard Fixed. Under the plan she would qualify for a principal limit of $127,400. Of this, $65,000 would be used to pay the existing mortgage and $8,350 would be applied to fees leaving $54,050 allowing Anna to pay off her $52,000 in credit card debt with a little left over.
The initial growth rate on the reverse mortgage is 6.31 percent. This is much lower than the interest rate she is paying on her credit cards — all of which are 20 percent or higher. In addition to her adult son, Anna has two grown adult daughters. None of the children depend on Anna financially or expect an inheritance.
Does a Reverse Mortgage Make Sense?
The CPA’s first concern is whether using a reverse mortgage for debt relief makes sense. Here are some arguments against using a reverse mortgage to pay off credit card debt:
Alternative Debt Relief Solutions
Absent the reverse mortgage, Anna will struggle to meet her monthly living expenses and pay the monthly minimum on her credit card bills. She could, of course, sell her home and use much of the net proceeds to pay off her credit card debt. She does not, however, want to move from her home nor does she want to move in with any of her children (she laughs when she tells the CPA that none of the children have offered to take her in). Her current housing costs are relatively low. Moving into a rental unit would save her little, if any money.
The CPA reviews some alternative debt relief programs:
All the alternatives under consideration (except paying off the debt in full) will adversely impact Anna’s credit score. But given her age, the impact on her credit score is less important than improving her finances.
When discussing the alternatives with Anna, the CPA encourages her to think long term. Both of Anna’s parents lived well into their 80s. She may spend another 20 or more years in retirement. While her teacher’s pension is adjusted annually for inflation, she has very little financial “cushion” other than her home equity. The CPA encourages her to speak with an attorney to learn more about bankruptcy. He also mentions that opting for the DMP is not irreversible. If her circumstances change, she can take a second look at a debt settlement plan or bankruptcy.
After giving it some thought, Anna decides to enroll in the DMP.
“I wasn’t raised to walk away from what I owe,” Anna told her CPA. “I’m not comfortable with bankruptcy or the debt settlement. I’ll try the DMP, if things change; we can always give the other alternatives a try.” With a DMP Anna did not need to tap into her home equity with a reverse mortgage. At some future date, she might take out a reverse mortgage if a financial need arose. Besides, Anna agrees with the CPA that the fees on the reverse mortgage are “pretty high.”
The CPA put Anna in touch with a local nonprofit credit counseling agency.
James Sullivan, CPA, PFS, MAS, works with his wife, Janet, who is an elder law attorney in Naperville, IL.
* PFP Section members, including PFS credential holders will benefit from additional Eldercare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. Non-members can click here to join the section.