George A. Downey
A recent Forbes article (June, 2017), Retirees Uncertain about Tapping Home Equity but Want to Age in Place, highlighted conclusions from research conducted by The American College of Financial Services. Their report, The Home Equity and Retirement Income Planning Survey, upholds the findings of other senior surveys confirming the great majority (83%), nearing or in retirement, want to stay in their homes and age in place.
The financial resources needed to age in place, however, become increasingly stressed as life events occur and conditions change. Ongoing funding challenges to Social Security and Medicaid, uncertain market conditions, and skyrocketing medical costs are but a few of the head-winds confronting seniors, especially those living on limited savings and fixed income. Researchers further warn this problem extends far beyond the less affluent to affecting more well-to-do retirees, principally due to lack of knowledge, inadequate planning, and failure to take appropriate early action.
Achieving the goal of aging-in-place with financial security requires: (1) knowledge and effective planning with well-informed decisions at every turn, and; (2) consideration of utilizing home equity wealth with financial wealth to generate more income and liquidity to meet expected and unexpected needs.
Home Equity Wealth Utilization
The decision to utilize home equity wealth should be made after consideration of available choices. This is especially important for seniors as this decision will most likely be final. Clearly, every situation is different and each contains a myriad of factual as well as emotional issues. There is no one-size-fits-all solution. The right choice requires an understanding of the individuals, their circumstances and desires, available options, and scrutiny of the solutions that best meet their needs. Examples include:
- Sale. Sell property to downsize, upsize, or relocate to be near family or move to different property type or location, and to increase savings.
- Sale-leaseback. Sale to a family member, or other buyer, willing to lease back the property to the senior seller. Provides upfront cash to the senior seller avoiding the need to move by renting for an agreed period of time.
- Partial Sale reserving a life estate. Sale, usually to a family member or heir, that conveys partial title to another owner(s) (called remainder men) for monetary consideration, or not, as agreed. Generally, the remainder men are responsible for property obligations and maintenance. The senior seller retains the right to reside in the property for life. This technique is most commonly used in conjunction with formal estate and/or financial planning.
- Conventional mortgage. Traditional single purpose loan provides lump sum cash and requires income, asset, and credit underwriting approval, and the obligation to make monthly payments.
- Home Equity Line of Credit (HELOC). A line of credit up to an approved limit requires monthly payments (commonly interest only minimum payments during the initial period). Funds can be drawn and repaid during the initial period, usually up to 10 years. After the initial term, access to funds is closed and fully amortizing payments are required for the remaining term.
- Reverse Mortgage. Home Equity Conversion Mortgage (HECM) is the HUD/FHA insured reverse mortgage developed exclusively for senior homeowners (62 and older) who want to remain in their home and utilize home equity wealth to increase financial security. Features include special and unique provisions including a guaranteed and growing line of credit and optional monthly payments to name a few. Requirements include mandatory consumer counseling and complying with FHA financial assessment guidelines.
- Home Sharing. Renting one or more rooms to boarders, or participating in the recently developed AirBnB lodging service to generate additional income.
The American College of Financial Services also noted that, although 83% of respondents indicated a strong preference to age-in-place, only 44% ever considered using home equity in retirement, and only 25% felt comfortable using home equity as a retirement income tool. Additionally:
- Only 14% had reviewed a reverse mortgage as a potential retirement tool.
- 49% of all respondents had a comprehensive written retirement plan in place.
- 40% of respondents that had financial advisors did not have a comprehensive written plan.
Their report concludes: “A good comprehensive retirement income plan should take into account where the retiree wants to live in retirement and should also discuss home equity as either an income or legacy tool, depending on the individual client’s goals, desires, and needs. Doing some homework on the potential advantages of using home equity wealth in retirement would benefit retirees and their advisors, especially if aging in place is the desired outcome.”
Retirement planning and preparation is not a good idea – it is a necessity. However, the data tells us that too few appear to be aware or understand this reality, or the potential they have to fortify financial security with home equity wealth. The only certainty now is that our retirement will be dramatically different than previous generations experienced. To retire successfully with financial security and dignity requires effective planning and action – including making the right decisions on when to retire, when to start collecting Social Security, how to manage savings, and how to manage and use home equity wealth.
About the Author
George Downey is the CEO of Harbor Mortgage Solutions. As a family- owned and operated firm, Harbor Mortgage understands how mortgage financing and refinancing can affect your family’s future. Founded more than 25 years ago, Harbor Mortgage remains committed to providing exceptional mortgage services to families in Massachusetts and Rhode Island. Let us help you find the right solution when you’re considering refinancing your current home, or purchasing a new one. And, if you’re a senior (62 or older, or are assisting one) and want information on reverse mortgages, you defnitely should contact us…this is our specialty.
For information, please visit our website at harbormortgage.com. You can reach George by phone at (781) 843-5553 or via email at gdowney@ harbormortgage.com.