Tapping Into Equity

I have always considered it a shame to see older people sit on real estate worth hundreds of thousands of dollars, yet not be able to enjoy themselves. They are the classic real estate rich, cash poor. I normally meet heavy resistance when I recommend that they borrow against their property and live it up with the money. Because these people, who are often in their 70s, 80s and 90s, grew up during the big depression of the 1930s, they have a terrible fear of debt of any kind. They also have a misguided sense of duty to their kids. They feel guilty about the idea of saddling their kids with a mortgage when they pass away. I have to explain that anyone inheriting a $500,000 house with a $200,000 mortgage is still getting a heck of a windfall.

Reverse mortgages are becoming more common for situations such as this. My personal preference is to have the person borrow out a large lump sum of money as a conventional mortgage. This makes even more sense nowadays because the interest rate can be locked in at very low rates. Reverse mortgages are generally adjustable rate, which means they can go up.

While each person's circumstances are different, I have worked with several people over the years in this scenario, where a large amount is borrowed and half the money is available to play with and the other half is deposited into an interest bearing bank account, out of which the monthly loan payments are made for the remainder of the person's life. For someone in his/her 80s or 90s, such an arrangement isn't difficult to set up.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/16/2002 07:39:00 PM Send this post: