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Elderly couple over their heads in bills should cut spending before deciding on a reverse mortgage

Each of these options has a cost you must consider before making this important decision. (iStock)

Q: My wife and I own our home in Florida. We paid a bit over $300,000 early last year for the property. The home was newly built when we bought it, but prices are rising quickly in our area and it’s now worth around $350,000.

I’m working full time and I’m around 60. My wife has a debilitating disease and we don’t have much in the way of savings. [We blow through] my present income each month, going into our savings to maintain our lifestyle and pay bills. Should we consider a reverse mortgage or does that only apply if we had a mortgage on our present permanent home here that is paid for? Any advice you can give us would be appreciated.

A: We’re sorry you and your wife are struggling with her medical situation and low income. We know that’s a hard place to be, and millions of Americans have been similarly affected in the past year due to covid-19.

Even so, you’re spending more than you make each month, and that’s never good. We wonder how you can alleviate your extreme financial stress enough to make a smart decision that will help, not hurt, in the long run.

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To reduce financial stress, you can either earn more (Can you find a higher-paying job or get a second, temporary job to help defray expenses?) or look at where you’re spending money and see if you can cut out some of those expenses.

Take a look at your recent credit card bill. It’s amazing how monthly fees for all those subscriptions everyone has add up: cable, phone, streaming services, security services, cellphone plans, magazine and newspaper subscriptions, online subscriptions, wholesale club memberships and so on all add up. Of those monthly expenses, what can you eliminate? How about most or all of them?

On the home front, it’s nice to know that the value of your home went up by $50,000. However, if you purchased your home and took out a huge loan to pay for it, a reverse mortgage won’t help much because you’ll only get a fraction of whatever equity is available.

If you paid cash for the home, you have more options. Whether you tap it by getting a cash-out refinance or a reverse mortgage is the next decision for you to make.

Usually when you do a cash-out refinance, the lender will allow you to finance a certain amount of the value of the home depending on your income and repayment abilities. We don’t know what you make, but it seems from your letter that it’s not much. If this is the case, a conventional lender would likely give you a small mortgage, and you’ll be obligated to repay it monthly. You might qualify for a home equity line of credit, but the amount would be small, and the interest rate is typically higher than a cash-out refinance.

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On the other hand, a reverse mortgage lender may give you more than 50 percent of the equity, depending on a range of factors, including where interest rates are at the time and how old you are. On that front, you need to be 62 years old or older to take advantage of a reverse mortgage; and in your letter you indicated you’re “around 60.” You may not qualify because of age, and even if you are 62, you’ll get a lot less cash from your reverse mortgage than someone who is older because age is a determining factor.

The good news is with a reverse mortgage you won’t owe a monthly payment, although you’ll still have to pay your real estate taxes. As you consider these options, you should know that in either case, if you take out money from the equity in the home to pay for your current living expenses, you’ll end up spending the equity you have in the home now and won’t have that money down the line.

Your final option is to sell and rent a much less expensive home. If you rent a home, you’ll have all of the cash from the sale to use for future living expenses, as long as it lasts.

Each of these options has a cost you must consider before making this important decision.

Frequently, the lowest cost option over the long run is to do a cash-out refinance or home equity line of credit. Interest rates are incredibly low now and the costs to refinance are not that high compared to a reverse mortgage, which typically carries a higher interest rate and fees. However, a refinance means a monthly payment and household cash flow is a problem for you.

If you qualify, a reverse mortgage means you won’t have any monthly payments and in fact won’t have to pay anything except real estate taxes and maintenance until the home is sold, whenever that is.

If you decide to sell, you’ll pay the broker’s commission, moving costs and other expenses of sale. And then you’ll have monthly rent payments.

Which brings us back to where we started: You’re spending more than you make and that’s unsustainable. You have to find a way to cut costs soon, or you’ll just burn through any cash you generate by selling your home, taking out a reverse mortgage or doing a cash-out refinance. And then what will you do?

We think you should start by trying to balance what you earn with what you spend, whatever it takes. Reducing financial stress will help make subsequent decisions clearer and easier. Good luck.

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