Going into retirement or being in retirement with debt poses a variety of problems.
- Every dollar that is going out towards debt is one less dollar to use during retirement, not only for living expenses but also for entertainment and a higher quality of life.
- Debt payments may have been much more manageable while working but can be a significant strain during retirement.
- You are currently, or will be on, a fixed income. The opportunity for pay raises, working overtime or promotions to payoff debt has passed.
- Missed or late payments on credit cards can increase your interest rate and payments significantly, increasing the strain on your finances.
- You may have to find a part-time or full-time job to live and make debt payments.
- You could imprison yourself in a house of cards by using them to live on and to make payments on other debts.
- You may put an undue stress on your retirement accounts, using what you have available faster than you may have anticipated.
- If you use retirement assets or savings to pay off debts, you no longer have that money for future use, and are missing out on growth through interest.
- You could be forced to endure harassing phone calls and mail if you can’t keep up with debts.
- You may get sued and face judgements and garnishments if you fail to make your payments.
- Chapter 7 bankruptcy could be a possibility. Depending on the equity in your home, you may be required to sell it to satisfy your creditors.
- Chapter 13 bankruptcy could be a possibility. This could mean monthly payments to a trustee for up to 5 years before your debts are discharged.
If You Have Debt In Retirement You Are Not Alone
|The National Council on Aging reports one-third of senior households |
have no money left over each month, or are in debt after meeting
essential expenses. (Institute on Assets and Social Policy)
In 2013, 61.3% of households headed by an adult aged 60+ had some form of debt. Among senior households with debt, the median total debt was $40,900. (Federal Reserve Board)
Debt held by those aged 50 to 80 increased 59%
from 2003 to 2015.
Paying Off Debts With A Reverse Mortgage May Be A Good Idea
Using a reverse mortgage to pay off debts can be a great way to handle the situation you are in. What you need to understand is that the debt is not going away. You are merely transferring it from one debt vehicle (i.e., credit cards or car loans) into the reverse mortgage. The main benefit of this is the fact that you no longer have any monthly payments. Not having monthly mortgage payments can greatly increase your cash flow.
Even though there is no monthly mortgage payment, you are still required to pay property taxes, homeowners insurance and other property charges such as HOA or flood insurance.
It is important to understand that the reverse mortgage is just a tool to relieve the situation you are in. Think of it as kind of a re-set button. If you do not manage your finances properly through budgeting and managing expenses, it is likely you will end up in the same problem you are currently facing. Using the reverse mortgage to pay off debts is typically a one-shot deal. You will more than likely not get a second chance.
If you need help with your finances, setting up a budget, or you need tips and ideas to reduce your expenses, I would highly recommend meeting with a Consumer Credit Counseling Services office in your area. The cost for their services is usually free, or at a very nominal fee.
One of the weird things about getting a reverse mortgage is that you cannot pay off your debts through the close of escrow. The only items that can be paid through escrow are any liens against the property. Liens include current mortgages, judgements and property taxes that may be due.
To pay off any personal debt you will need to request the cash at closing. The amount of cash you request at closing will either be wired into your account or the escrow company will cut you a check. I would highly recommend opting for the wire transfer as you will have access to the funds immediately. If you get a check, all or a portion of the funds may have a hold placed on them by the bank. The hold may be a few days or a couple of weeks. It will depend on your bank’s policies.
Once the funds have been deposited, and any holds have been lifted, you can then start writing checks to your creditors. Something to consider and worth asking your creditors is if you can get a discount on what you owe if you pay it off in full. It is common for hospitals to provide a discount if the amount is paid in full. Remember, it does not hurt to ask, and the worst they can say is no. If they say yes, you could end up saving hundreds of dollars.
Will You Be Able to Pay Off All Your Debts?
There are many different factors that will determine if you can pay off all your debt immediately. These factors are your age, value of your home, current interest rates, how much you currently owe on any mortgages and the amount of debt.
HUD / FHA instituted a simple policy to discourage homeowners from withdrawing all of their equity at the close of the loan. With the adjustable rate options, this policy limits access to equity to 60% of your initial loan amount and after one year you gain access to the remaining 40%. With a fixed rate mortgage,you are limited to 60%. I know this can be a little confusing, so let me give you some examples.
Let’s assume you can borrow $100,000 and you opted for the adjustable rate mortgage. You would have access to $60,000 the first year.
- If the payoff of the current mortgage, plus the closing costs were to equal $60,000, you could get access to an additional$10,000. On the one year anniversary of your loan, you would have access to the remaining $30,000 plus whatever growth happened during that year.
- In this scenario, you would gain access to an additional $10,000, which may or may not be enough to cover the payoff of all your debts. However, paying off the mortgage could give you some breathing room until the remaining amount of equity was available to pay off debts in one year. If things are not that tight financially, you could put the savings from the mortgage payment that you are no longer making towards your debt. This would reduce what you would need to pull out in the future and make more funds available should you ever need them.
- If the payoff of the current mortgage, plus the closing costs was $40,000, you could request the remaining $20,000 to payoff debts. On the one year anniversary of your loan, you would have access to the $40,000 plus whatever growth happened during that year.
- In this scenario, the extra $20,000 may or may not be enough to pay off all your debts. Once again, paying off a large chunk of debt could free up some significant cash flow.
- If the home was owned free and clear, you could request up to $60,000 initially, less closing costs. On the one year anniversary of your loan, you would have access to the $40,000 plus whatever growth happened during that year.
- In this scenario, there is a good chance that you would be able to get all your debts paid off.
Now let’s assume you can borrow $100,000, and you have opted for the fixed rate.
- If the payoff of the current mortgage plus the closing costs were $40,000, you could take out the remaining $20,000. There is no additional equity available at any time in the future.
- In this example, the $20,000 may be enough to pay off your debt. But you also need to consider that you are leaving $40,000 of equity on the table. You are exchanging $40,000 for the fixed rate.
- If the payoff of the current mortgage plus the closing costs were $60,000, you would be able to get an additional 10% of the loan amount, which in this example would be $10,000. There is no additional equity available at any time in the future.
- In this example, you only get an additional $10,000 beyond paying off your current mortgage. You are leaving an extra $30,000 on the table that you will not be able to access.
- If the payoff of the current mortgage plus the closing costs were $95,000, you would be able to get the remaining $5,000.There is no additional equity available at any time in the future.
- In this example, it is what it is. You only qualify for $100,000 initially. With the payoff and closing costs equaling $95,000, there is only the $5,000 left.However, this may still be beneficial because you can use the monthly savings from not having a monthly mortgage payment to pay down your other debts.
I just want to re-iterate how important it is for you to understand that the reverse mortgage is not a magic pill. It is critical for you to have a plan that goes beyond just using the reverse mortgage to pay off your debts to get rid of those payments. This plan includes taking a hard look at your money management skills, current expenses, creating a budget, potentially altering your lifestyle and exploring ways to save money on your monthly expenses.