Historic increases in housing wealth: a blessing for some – a burden for others.
By George A. Downey, May 15, 2023
According to the S&P/Case-Shiller U.S National Home Price Index, home prices increased by 11.33% (January 2020 to January 2021); 19.25% (January 2021 to January 2022); and 10.65% (September 2021 to September 2022). Overall, that’s a whopping increase of approximately 46% in less than three years.
As a result, home equity (housing wealth) achieved levels never imagined. Clearly, these increases are not sustainable and may very well decline as post-pandemic recession realities and financial turmoil disrupt financial markets worldwide.
The Downside – When blessing becomes burden.
These historic gains came easy as home prices skyrocketed – largely from government stimulus programs, cheap money, and hyper-intense buying competition. Then, seemingly without warning, recession loomed, inflation soared, and the price of just about everything increased overnight. Seniors on fixed incomes were especially hard hit as the increasing costs of homeownership eroded limited financial resources.
Simply put, the problem boils down to having sufficient cash flow and liquidity.
Housing wealth may be a significant asset, but it is not liquid. It can’t be used unless one refinances or sells. Refinancing is the only way those who want to age-in-place can gain access to it. Unfortunately, rapidly rising interest rates and more restrictive lending requirements make borrowing eligibility more challenging. Moreover, taking on long-term payment obligations in later years may not be a wise choice.
The Upside – A solution with a guarantee
The HUD/FHA insured Home Equity Conversion (HECM) reverse mortgage enables older homeowners the ability to access home equity under terms designed to meet their needs.
The funding amounts are based on the current market value, age of the youngest owner (one must be 62 or older), and current interest rates.
Unlike Home Equity Lines of Credit (HELOCS), which can be changed or closed by the lender, HECM benefits cannot be changed as long as the loan is in good standing. A popular choice for many years, HELOCs lack the versatility and security seniors seek.
Going forward, HECM terms are guaranteed as long as one owner lives in the property, pays property charges, and continues to provide basic maintenance. Most importantly, the terms and benefits will not be affected by any adverse change in the economy, real estate values, or potential lender failure.
Reverse Mortgage Overview
• Loan terms are guaranteed – access to cash cannot be frozen, limited, or cancelled as long as the loan remains in good standing.
• No monthly payment obligations – voluntary payments are permitted but not required.
• Title to home does not change – the lender does not take any ownership in the home.
• Flexible withdrawal options – credit line, periodic payments, lifetime income, or cash as needed,
• Growing line of credit – the undrawn balance of the credit line grows (compounding monthly) providing access to more funds in the future.
• No maturity date – repayment not required until no borrower resides in the property.
• Non-Recourse loan – neither borrowers nor their heirs incur personal liability.
• Repayment of loan balance can never exceed the property value at the time of repayment.
Good standing – Borrower obligations are limited to:
- Keeping real estate taxes, homeowner’s insurance, and property charges current
- Providing basic home maintenance
- Continue living in the property as primary residence.
Good for some – not for all
Reverse mortgages are unique. They were designed to meet the varying needs of older homeowners who want to age-in-place. The terms, benefits and operation are different from traditional (forward) mortgages.
Education is key to understanding if a reverse mortgage may be a suitable solution. The recommendation is to confer with a knowledgeable and experienced Certified Reverse Mortgage Professional (CRMP) to determine suitability and the best course of action for your situation.
TO LEARN MORE
Get the facts and determine if, or how, the various options to utilize housing wealth may enhance your individual needs and circumstances. For more information, visit the National Reverse Mortgage Lenders Association (NRMLA) website, www.ReverseMortgage.org, or contact the author for a private consultation.
George Downey, CRMP (NMLS ID 10239) is the Regional Senior Vice President of The Federal Savings Bank branch located at 100 Grandview Road, Suite 105, Braintree, MA 02184. Contact Mr. Downey at (781) 843-5553 / Cell (617) 594-3666 / email@example.com