A reverse mortgage could keep Mom in her home
Dear Liz: My healthy and active 82-year-old mother is faced with having to sell her home this year because she’s running out of money. She has lived a very minimal lifestyle for many years as her savings dwindled, and her income is now basically Social Security. She owes $25,000 on a home worth more than $700,000 in a top school district. We don’t know if we are jumping the gun with this sale. I could move in with her and pay rent for a year or two, although that would mean a longer commute for me and would just put off the day she has to sell. There are things that must be done to the house for upkeep, and her being cash-poor puts her in a crunch. My brother will help pay for minor sprucing up depending on what the real estate agent says we need to do to make the house presentable, but if Mom remains in the home there are other things to be done. We are assuming that we should sell it and find an apartment for her to rent until she needs more assisted living at a later age. Are we right to take action now?
Answer: Your family needs to take action, but setting your mother up for not just one but possibly two future moves probably isn’t the best course. Moving is terribly disruptive, and AARP surveys show that the vast majority of older people prefer to “age in place” rather than leave their homes.
Investigate reverse mortgages as one option. With a reverse mortgage, your mom could pay off her small mortgage and tap the substantial equity in her home. She could get a lump sum, a stream of monthly checks or a line of credit that could allow her to fix her home and live more comfortably. She wouldn’t have to make payments or pay income taxes on this loan, and it wouldn’t have to be paid off until she dies or moves out.
Reverse mortgages can be expensive because of the fees involved, although a new version of the federal Home Equity Conversion Mortgage offers lower upfront fees, and some lenders will waive or reduce their fees. You’ll want to do plenty of research, and shop around to make sure you get the best deal. The AARP and U.S. Housing and Urban Development websites have a lot of information about reverse mortgages.
If your mom decides she’d rather sell, she should consider a move directly to a senior community that offers assisted living as an option. She will have the most choices if she’s healthy when she moves in. Although she may never need the assisted living option, many people start to need some kind of help with daily activities by the time they reach their mid-80s.
Are businesses protecting your Social Security number?
Dear Liz: Your recent column about disclosing Social Security numbers raises an important question. Federal tax law requires millions of Americans to disclose their Social Security numbers to those who pay a recipient at least $600 in a year. In practice, many payers request this information when paying much less than that. Millions of people have their Social Security numbers floating around on millions of computers, many of which are not secure. Why doesn’t anyone write about this or discuss the consequences of being required by law to disclose your Social Security number all over the place? This requirement is a recipe for identity theft.
Answer: You’ve pointed out another problem with using Social Security numbers as an all-purpose identifier. Federal and state laws require businesses that collect Social Security numbers to protect that information. But the fact remains that the more entities that have your number, the more vulnerable you may be to identity theft.
As an individual, you’re unlikely to change the IRS’ mind about the necessity of collecting this information. But when you’re asked for your Social Security or tax ID number, it’s fair to ask the requester how your information will be protected. That at least puts the requester on notice that you expect the laws regarding the safeguarding of personal information to be followed.
Don’t close accounts if you’re trying to improve your scores
Dear Liz: I was able to pay off 80% of my credit card debt recently. I have several cards from stores I no longer shop at and have not had activity for several months. Should I cancel those cards to reduce the number of active cards or leave them alone?
Answer: Closing accounts won’t help your credit scores, and may hurt them. If you’re trying to improve your scores or plan to get a major loan in the next several months, leave them open.
If your scores are fine and you don’t expect to apply for a mortgage or car loan soon, then you certainly can close a few retail cards. But try to keep open your major credit cards, such as Visa, MasterCard, Discover and American Express.
Should you refinance a mortgage that’s almost paid off?
Dear Liz: We have a second home close to a lake that we bought in 2002 for $370,000. It could have sold for $1 million at the peak of the market but is now worth about $800,000. We owe $100,000 on a mortgage with four years left until it’s paid off, but the payments are a hardship and barely manageable. I don’t expect prices in the area to improve much in the next several years and they may decline more. Since I could sell the house now and get back all the money I ever put into it, I figure that every dollar I pay on it from now on is a dollar of profit burned. Selling the house is not an option, though, as my wife is adamant about keeping it. We are 10 years from retirement and have a kid to put through college. Our income is just under $100,000, we have no other debts and our primary home is paid off. Should we refinance the remaining balance to a 30-year loan, or just grin and bear it until the payoff in a few more years?
Answer: If you’re on track saving for retirement and your child’s college education, then the smart thing would be to gut it out and get the property paid off. You’re so close to the end of this loan that the majority of your payments go toward principal. Refinancing might lower your payments, but would dramatically increase the amount of interest you’d pay over time.
If you’re stinting your savings, though, the math gets more complicated. You could view the paid-off vacation home as an asset you could tap later for retirement expenses or college. In that case, getting it paid off on the current schedule would make sense. If selling or borrowing against the home in the future isn’t an option, though, then lowering your payments so you can save for your other goals starts to make some sense.
If that’s the option you choose, consider a 15-year loan rather than a 30-year loan. The shorter loan will still dramatically reduce your payment but you’ll pay about 60% less interest over time.
Budgeting in the big city
Dear Liz: You’ve written about the 50/30/20 budget structure that people should strive to achieve. As you said, it’s a difficult feat. But here’s my question: How does one even come close when you live in a major metropolitan area? In my particular case, home values in my area have remained intact in many places and demand for apartments is so high that vacancy rates are the lowest in the nation. To get into a relatively safe neighborhood with access to public transit, rent is over $1,000 with a roommate or two. Finding that 50/30/20 balance seems impossible for people who live here and we can’t all just relocate.
Answer: If you live in a high-cost area but don’t have a high income, you’ll need to get creative if you want to keep your “must have” expenses—shelter, food, transportation, child care, minimum loan payments and insurance—under 50% of your after-tax income.
Many people in high-cost areas devote 40% or more of their incomes to shelter costs, which makes it all but impossible to have enough money left over for their “wants” (clothes, vacations, gifts and other non-necessities that should consumer 30% of their after-tax incomes savings, according to the 50/30/20 plan) or savings and debt repayment (which should consume 20% of your after-tax income under the plan). The result is a perpetually unbalanced budget, which often leads to more debt and lots of anxiety.
But people have come up with various solutions to better balance their budgets. Blogger Donna Freedman was an apartment manager for several years, which helped lower her shelter costs. Fred Ecks, who retired in his 40s, lived on a boat to reduce his rent in notoriously high-cost San Francisco. Other people have exchanged their services for free or reduced rent—by babysitting or serving as a companion to an elderly person.
If you can’t find a solution that lowers your housing costs, you have two options: continue to live with a lopsided budget, and accept that you may never be able to achieve a balanced financial life, or move to a place where you can make the math work.
