Chris is a busy guy. Melissa, his lovely wife, and their 3 adult children are disabled. While they do receive disability income, it’s limited and Chris has worked hard to create security for his family and to take care of them. Multiple rental properties provide additional income, but also have maintenance needs. He knows he needs to shift gears, since at 70 he’s not going to be able to continue do all the maintenance himself and still be there for his family members in the way that he wants to. Caregivers in retirement don’t completely retire.
The Financial Challenge:
Chris has a private loan of $250,000 now due on one of the rental properties and needs funds to pay it off. Their primary residence is owned free and clear, but, they don’t want to refinance it with a cash-out loan as this would only just shift the monthly debt payment from the rental to the primary residence (and interest rates are now higher). That’s not going to help cash-flow. Chris considered selling any one of their rental properties, but the monthly income generated could have a greater value to his adult kids down the road. Due to the kid’s disabilities, they would need it to.
Solving today’s time-sensitive loan payoff requirement, coupled with balancing the long term income requirements was indeed a challenge. It had tax implications too.
- Kim, with Chris’ permission of course, went seeking an opinion from a tax specialist and financial advisor.
- Evaluating all the owned properties for future value, including their current primary residence, was a needed analysis.
- All mortgage loan types were considered side by side.
- The primary residence had the highest value & would likely appreciate the most over time, given it’s prime location. It was also the least suitable for the adult kids to live in on their own, after Mom and Dad Chris were no longer able to take care of them.
- It was free and clear and could provide the most cash-out proceeds to pay off the coming due, private Note.
- A Reverse Mortgage would be the loan type, not requiring a monthly principal & interest payment.
- This solved the cash-flow crunch, it didn’t just shift it.
- Eliminating the $1200.00 monthly payment for the personal NOTE meant that money could be applied elsewhere, like hiring maintenance services for the other properties.
- The other rental properties would be held free and clear, for either the adult kids to live in eventually, or to be sold when the market and tax environment was right.
Chris achieved several goals:
- Paid off an obligation in a timely manner.
- Created more cash-flow allowing him to hire a person to take on maintenance tasks he can no longer easily do.
- Managed potential tax liability.
- Maintained current income sources and secured his future opportunities by retaining all his rental properties at this time.
- Created a large, stand-by line of credit for any use he needs, through the FHA Reverse Mortgage.
And, it created time and opportunity for Chris to rest.
The reverse mortgage (HECM – Home Equity Conversion Mortgage) paid off the balance of the private note at $250,000 and created a total line of credit $191,000. This line of credit will grow at .5% more than the interest rate of the Reverse Mortgage. And no monthly principal and interest payments are due while Chris or his wife live in the home.
What to Do Next:
The needs of seniors Kim speaks with vary significantly. Taking time to discuss the home financing options and offer creative solutions is why Chris appreciated Kim’s help.