HELOCs only add to the problem
Core Logic reports that the average homeowner is sitting on about $300,000 in equity. A tidy sum for most whose home represents their largest asset. With more older homeowners struggling to pay their monthly obligations the question arises- should seniors use their homes to pay their bills? Downsizing: A realistic option? In such circumstances, many financial pundits suggest that selling the home and downsizing may be the best choice. It may very well be for those who may find themselves struggling to maintain their property or who live in an area with a higher cost of living. “If you really want to use your home equity in the best way possible, selling the home and downsizing would be the way to go”, said Jay Garvens, business development manager at Churchill Mortgage in a recent CBS Money Watch column. “Simply sell the house, take the cash, and move to a more affordable community. You would then have enough money left over to pay your bills for the remainder of your retirement years”, says Garens. But is it really that simple? Not exactly. Older homeowners with an existing mortgage who want to sell and downsize are likely to find their new mortgage payment is not substantially less than the mortgage payment they have today thanks to the average 30-year mortgage rate being more than double what it was three years ago. This begs the question of what is the best way for an older homeowner to extract equity from their home without increasing their already burdensome debt load? HELOCs only add to the problem Some may opt for a Home Equity Line of Credit (HELOC) to get the funds needed to cover their monthly expenses. The problem is HELOCs require monthly payments which will increase after the loan’s initial draw period ends. This leaves the homeowner in a worse position having yet another bill to pay each month undermining their need to increase cash flow to meet their monthly obligations. This is where the desire and accessibility to cash can lead to short-term thinking with long-term financial consequences. The no-payment, optional payment loan“If there are no other assets to access, a reverse mortgage can be a way to maintain retirement,” David Orsolino, a financial advisor at Strategies for Wealth told CBS Money Watch. “This will allow for tax-free income and allow you to remain in the home.” Actually, it’s tax-free loan proceeds which are typically not taxed like income. Any additional source of income is subject to federal or state income taxes. Yet, Mr. Orsolino is correct that reverse mortgages can help older homeowners maintain their standard of living in retirement. Wanting to bequest the home to adult children is admirable but should be done knowing that 70% of adult children plan to sell the home they inherit according to a Charles Schwab survey. In such situations, the pragmatism of selling the home overcomes any sentimental misgivings the children may have of keeping their childhood home. Older homeowners struggling to pay their monthly bills should consider the following questions:If I don’t tap into my home equity will we be a financial burden to our children? Does selling and relocating to a new home make financial sense? Would getting a HELOC to access cash be the best choice when it only adds to my monthly payments? Do I want to return to work? If so, am I mentally and physically prepared to do so? Would my children prefer that we live comfortably and be financially independent instead of inheriting the home? Not everyone has the equity required to qualify for a reverse mortgage. But for those who do the flexibility of the loan and the boost to their monthly cash flow may be just the answer they’ve been looking for. By Shannon Hicks
Why equity-tapping challenges may make reverse mortgages ‘inevitable’
Tapping into home equity, particularly for people in or near retirement, can be challenging — especially for those who may have a pressing need. Traditional equity-tapping methods — such as selling the home or taking out a home equity loan — could present lifestyle challenges, which is where alternative options like reverse mortgages can come into play. But these products also come with their own challenges, according to a column published recently by The New York Times. Older homeowners may contemplate the traditional methods, but depending on the person, they may be out of the question, according to financial columnist Ron Lieber. “Your home may be just the way you like it, because you built it that way or spent decades fixing it up,” the column explained. “If you’re attached to local doctors or a house of worship, it is difficult to cut ties and move away. Clearing out years of belongings is a total pain. And an appropriate and affordable new place — no steps, minimal maintenance — may simply not exist wherever you want to be.” Interest rates also further complicate matters if the homeowner has a more beneficial mortgage rate than is available today. And many seniors who hope to leave their home to an heir may find other challenges tied to the idea of selling. “That brings us to reverse mortgages,” Lieber wrote. “With this product, eligible people 62 and older can extract equity in a variety of ways, say through a lump sum. Interest accrues in the background, and the balance of the reverse mortgage goes up instead of down, the way a normal mortgage would. You generally pay off the mortgage when the home is no longer your principal residence.” But most people “reject reverse mortgages,” according to the column. “Lenders have rarely underwritten more than 100,000 federally insured ones in any fiscal year, and that hasn’t happened since 2009,” Lieber wrote. “Many older people remember scandals involving the products, when borrowers felt misled and surviving spouses or heirs could not keep the homes. New federal protections helped clean things up.” Considering the demographic realities, however, it may not be possible to avoid products like them. “Reverse mortgages or something like them seem inevitable in a nation where individuals are entirely responsible for their own retirement savings,” the column explained. “One good test for their utility is this: Do any financial advisers who pledge to act only in the best interest of their clients help members of their own family borrow in this way?” One financial planner — Jeremy Eppley of Owings Mills, Maryland — shared the story about why he recommended the product to a client. His aunt owns her home free and clear, but inflation has encroached on her fixed income in retirement. A reverse mortgage helped improve the quality of her life, Eppley told the Times. “I’d never heard of her going on vacation,” he said. “She could live a little.” Other companies are engineering alternatives for tapping home equity, like shared equity investment products or sale leasebacks. But the core issue of the way that retirement financing is structured in the U.S. may necessitate a broader adoption of home equity-tapping tools, the column said. “With home equity, we may have tipped too far into seeing homes as totems of a financial life well and conservatively lived,” Lieber wrote. “Homes are trophies, sure. But their equity is also a tool. Absent any radically improved government safety net, people without much savings are going to need more ways to extract it.” Chris Clow