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Got Home Equity?

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New ways it can increase retirement savings to help you “Age in Place”

By George Downey

If you’re in or approaching retirement, own a home (with or without a mortgage), and are uncertain about your financial future, you may be in luck.

The Center for Retirement Research at Boston College, along with other researchers and retirement experts, sounded the alarm that great numbers of aging Americans are at high risk of running out of money in retirement.  In fact, it’s a documented national emergency.

Old School Solution – 3-Legged Stool

Historically, retirement planning was based on a three-legged stool, including: (1) employer funded pensions, (2) Social Security, and (3) personal savings.  That’s all changed.  Employer funded pensions, for the most part, are gone and personal savings are at all-time lows.  Add to that longer life expectancies and unexpected funding shocks from health, long term care, and other risks a bleak forecast may lie ahead.  Retirement security won’t be what it used to be.  So, what can be done?

New Improved Solution – 4-Legged Stool

Fortunately, senior homeowners may have another resource – home equity (now referred to as housing wealth) could be used to increase income and extend financial security.  Until recently, housing wealth has not been a basic consideration in retirement planning, but that too is changing.

Adding housing wealth (the fourth leg) to financial wealth management achieves three key objectives: (1) improved cash flow and liquidity, (2) reduced longevity risks, and (3) protection of assets under management.

Research data shows that seniors with $100,000 or more in savings, about 90 percent own their home. Those with less savings, about 70 percent are homeowners, still a substantial majority.  For most, housing wealth makes up about 50 percent of their total net worth.  And, the great majority (over 85 percent) indicate they plan to stay in their homes and age in place.

Options To Using Housing Wealth

Clearly, every situation is different and requires education and analysis by qualified professionals. Depending on individual circumstances and preferences, recommendations to use, or not use, housing wealth require careful consideration.  Considerations include:

SELL THE HOME TO DOWNSIZE OR RIGHT-SIZE.  At the time of this writing, May, 2018, residential home values are at record levels. Although most seniors want to stay in their homes, is it the right decision for the longer term considering potential health, financial, and other factors.  If not, does selling the home now to maximize financial gain make more sense? As we know, home value cycles change, often dramatically.

The best time to sell is when you don’t have to, when you are in control, and values are high.  Later, if declining health, death of a spouse or unexpected events may force a sale in a less favorable market.

Considering declining health and other issues confronting aging homeowners, when is the best time?  What are the important considerations?  Might the best time be now?  Why?  Why not?

BORROWING AGAINST HOME EQUITY.  Basically, there are two borrowing options:

  1. Traditional mortgage refinancing or a home equity line of credit. Both require meeting financial and credit qualifications for eligibility along with the obligation to make ongoing payments.  If the need is short term, or the borrower(s) are more affluent, this might be a good choice.  On the other hand, if the borrowers have, or foresee, cash flow or liquidity constraints they should consider the unique benefits of a reverse mortgage.
  2. Home Equity Conversion Mortgage (HECM). HECMs are the HUD/FHA insured reverse mortgage program.  This program was developed and approved by Congress to provide senior homeowners (62 and older) the ability to remain in their homes indefinitely, without the obligation to make monthly payments, and utilize a portion of their home equity to increase financial resources and extend retirement security.

Unfortunately, too few consumers (and professional advisers) adequately understand the program, the result of earlier misconceptions, negative press coverage, and a general lack of knowledge.  That said, although HECMs can provide additional income and liquidity, they are not a suitable solution for everyone.  The program, established in 1989, has undergone numerous changes to improve the benefits and increase consumer protections.

Most seniors that are selling and relocating will purchase the new home for cash to avoid the burden of future monthly payments.  However, the HECM can be used for purchase, requiring a down payment of approximately 50 percent.  The buyer retains the other 50 percent in their savings account increasing liquidity.  The HECM financing enables them to live in the property indefinitely without any obligation to make payments.  Their future responsibilities are: to keep property tax and homeowner insurance payment current, perform basic maintenance, and live in the property as their primary residence.

Retirement researchers, academics, and retirement experts are now promoting consideration of the HECM reverse mortgage as a fundamental tool to include housing wealth in the retirement planning process to increase and extend retirement security.  For more information, visit our website, www.HarborMortgage.com, or www.reversemortgage.org, the website of the National Reverse Mortgage Lenders Association.

SALE/LEASE BACK – KEEPS THE HOME IN THE FAMILY.

This arrangement enables parents to sell the home to an adult child or a trust designed for the long-term benefit of selected family members, and then lease the property back. It’s an interesting solution for the right situation.  It can enable parents struggling with cash flow issues to remain in their home, and preserves the home as a legacy.

The parents get the benefit of receiving tax-free cash, elimination of any mortgage debt or liens, and the ability to remain in their home.  The buyers get rental income that may be offset by related business expenses for tax purposes, and the benefit of any future appreciation in value.

RENT A SPARE ROOM, OR AirBnb

With apartment rents so high today, renting a spare room can make a lot of sense to the right renter and to the homeowner.  For example, depending on location and amenities, monthly rents of $300 to $500 seem reasonable.  Annually, that translates to an extra $3,600 to $6,000, found money.

Co-living arrangements are common and growing, especially with the advent of Airbnb, the short-term room sharing service that has exploded across the country.

TO LEARN MORE

It’s a new day in retirement planning, and the inclusion of housing wealth is proving to be a game changer. Whatever your circumstances, if you are in or approaching retirement, own a home (or plan to) you are well advised to learn and explore the various options available.  Most likely, you will be surprised and impressed on the value it may add to your financial future.

george-downey-headshot-08-25-16About the Author

George Downey (NMLS 10239) is the founder of Harbor Mortgage Solutions, Inc., Braintree, MA, a mortgage broker licensed in Massachusetts (MB 2846), Rhode Island (20041821LB), NMLS #2846.  Questions and comments are welcome.  Mr. Downey can be reached at (781) 843-5553 or email: GDowney@HarborMortgage.com

Reprinted from the June 2018 edition of the South Shore Senior News

 

 

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