From reading the story in the Atlantic, “The Secret Shame of Middle-Class Americans,” there’s more meat here than on the majority of middle class plates.
None (of the surveys) captured what was happening in households trying to make a go of it week to week, paycheck to paycheck, expense to expense. David Johnson, an economist who studies income and wealth inequality at the University of Michigan, says, “People studied savings and debt. But this concept that people aren’t making ends meet or the idea that if there was a shock, they wouldn’t have the money to pay, that’s definitely a new area of research”—one that’s taken off since the Great Recession.
“According to Johnson, economists have long theorized that people smooth their consumption over their lifetime, offsetting bad years with good ones—borrowing in the bad, saving in the good. But recent research indicates that when people get some money—a bonus, a tax refund, a small inheritance—they are, in fact, more likely to spend it than to save it. “It could be,” Johnson says, “that people don’t have the money” to save. Many of us, it turns out, are living in a more or less continual state of financial peril. So if you really want to know why there is such deep economic discontent in America today, even when many indicators say the country is heading in the right direction, ask a member of that 47 percent. Ask me.”
A recent survey said that 47% can’t even come up with $400 for an unexpected emergency room visit, without selling something or borrowing the money from someone.
One consequence of worrying about making ends meet has been an increase in Americans over 62 taking out reverse mortgages. The number of reverse home equity conversion mortgage (HECM loans) made in each federal fiscal year peaked with the housing crisis in 2007-2009 in FY 2009 at 114,692. Loans fell off to FY 2012 at 54,822, and seem to be around 60,000 per year. FY 2013 was 60,091, FY 2014 51,642, and FY 2015–58,043.
Reverse mortgages—they are the last thing that your clients would ever want, and they are the first thing they need as a last resort. Such are the opposing, yet surprisingly complimentary, views of what is still for many a highly controversial topic.
What is a Reverse Mortgage?
“A reverse mortgage is a loan against home equity that doesn’t have to be repaid until you move, sell your home or die. You can receive a lump sum, a line of credit, monthly payments or a combination. To qualify, you must be 62 or older. (If the home is owned jointly, both owners must be at least 62.) The amount you can borrow is based on your home’s value, current interest rates and your age.”
To apply for a reverse mortgage was easy prior to 2015. But that is about to change for many, as new regulations go into effect in 2015 that will require individuals that opt for a reverse mortgage to have financial planner counseling.
Here’s an example of a couple, both over 62 owning a home valued at $425,000 and two mortgages totaling 200,000. The maximum loan amount may be 48% or 204,000. That’s enough to pay off existing mortgages and save $2,000 in mortgage payments, but there would be little cash available. That would leave the couple with $24,000 in savings per year less property taxes, upkeep and insurance. That extra savings could mean the difference between just getting by and a comfortable retirement.
The reverse mortgage certainly is a viable option for some older Americans, especially if you are not considering moving. Others believe that a reverse mortgage is a little like a car airbag. It’s nice to know it’s there. But if it ever has to be used, the driver’s already in trouble.
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