How Financial Advisors Can Help Clients Use Their Homes to Build Wealth
by Ashley Bete, CEO and Chief Investment Officer, Leap Analytics February 23, 2023 According to the Federal Reserve, U.S. homeowners have $29.5 trillion of real estate equity as of the third quarter of 2022. By any measure, this is a lot of money. Historically, savvy homeowners have deployed the equity in their homes to strengthen their economic well-being and build wealth. However, putting home equity to work is an advantage increasingly inaccessible to a growing number of homeowners. While “location, location, location” is the mantra in determining a home’s value, it’s a numbers game when it comes to leveraging that value. The impact of low credit scores, elevated levels of debt and rising mortgage rates has limited the reach of this dynamic driver of wealth. Expanding mechanisms to leverage home equity is key to strengthening our communities and ensuring more equitable outcomes. Financial advisors serving clients with a sizable portion of their wealth held in a primary residence should take a closer look at the options available to homeowners to help build a sustainable financial plan. Here are challenges advisors should consider when recommending these solutions to clients: Reverse Mortgage For aging homeowners near or at retirement age, a reverse mortgage might be a feasible option if they live in their homes and are at least 62 years old. There are three types of this product so there is some flexibility. All are heavily regulated products and will require homeowners to complete financial counseling to determine if it is the right option for their financial situation. For clients who have no debt other than an existing mortgage — proceeds from a reverse mortgage can only be used to pay the mortgage — this could be an option if there are no family members interested in inheriting the property. Because there is no payment schedule, cash proceeds — distributed as a lump sum, line of credit or monthly payment — can be repaid at any time, providing flexibility in managing cash flow and expenses. However, the amount does accrue interest, so the balance increases over time – unlike a traditional mortgage that decreases with each payment. Cash Out Refinance The cash-out refinance option is ideal when home values are rising, and interest rates are falling. With the inverse occurring, it is not a feasible option for many homeowners today especially those looking to lower debt payments. However, homeowners who insist on pursuing this option should understand: In addition, the homeowner must meet qualifying criteria of having a credit score and debt-to-income ratio that is acceptable to the lender in addition to at least 20% in home equity. Frankly, this isn’t a great option for most homeowners today. Home Equity Line of Credit and Home Equity Loans The current national average for a 30-year-fixed mortgage is 6.37% and expected to rise as the Federal Reserve has signaled it will continue to bump rates higher to combat inflation. This makes home equity lines of credit (HELOC) and home equity loans a challenging proposition. While HELOC proceeds can be used for anything, they are a revolving credit line and subject to rising interest rates. This could be adding new debt for a client trying to pay down or consolidate loans. Home equity loans are fixed-rate debt instruments, so there is less risk of a ballooning payment. However, with interest rates climbing higher, homeowners should act quickly if this is the path they’d like to take. Home Equity Agreements (HEAs) A relative newcomer to the market, home equity agreements (HEAs) — also known as home equity investments (HEIs) — are not loans. There is no repayment term or interest charge. Instead, they allow an organization or individual to invest in a portion of the home’s existing equity. The investor provides a cash payment in a lump sum or scheduled disbursement. This option may be feasible for clients who have poor credit or are struggling with mortgage payments because there are no restrictions on how the HEA payment is used. The funds could be used to raise credit scores by repaying outstanding debt and allowing the homeowner to refinance the current mortgage to one with a lower interest rate. HEAs do have a termination date — usually 10 to 30 years — where the homeowner must buy out the investor’s stake or consider selling the home. While all these options are available, they are not all within our neighbors’ reach. Home ownership remains the central tenet of the American Dream and a tangible representation of success. It can also be a springboard to ongoing wealth accumulation. Companies and platforms dedicated to closing the wealth gap by offering accessible home equity access solutions, along with the technologies, expertise and support to increase the financial wherewithal of their clients can serve as the rising tide that lifts all boats.
Nearly 90% of seniors think the United States is experiencing a retirement savings crisis.
IRVINE, Calif., Feb. 15, 2023 /PRNewswire/ — Fearful of outliving their savings, many older homeowners are making difficult lifestyle choices to cut expenses, according to new data from American Advisors Group (AAG). Despite inflation and economic concerns, some seniors have managed to weather the storm without making lifestyle changes. However, some seniors have had to cutback. To learn exactly how seniors are feeling AAG, a national leader in home equity solutions for seniors, conducted the Retirement Savings Crisis Survey, with over 1,500 participants ages 60-75 across the U.S., to gain more understanding. “The retirement savings crisis is a real thing. Our data highlights the severity of the crisis and the actions seniors are taking to make ends meet,” stated Chris Moschner Chief Marketing Officer American Advisors Group. “In inflationary times like these a reverse mortgage is one option seniors can utilize to generate increased cash flow by unlocking their home equity and easing the pressures on everyday expenses.” The data show that seniors are feeling economic strain, and some are fearful that they will outlive their savings. Of those respondents who answered they were cutting back on non-essentials to save money: While seniors search for ways to increase their cash flow, senior housing wealth reached a historic high at a record $11.58 trillion, according to the National Reverse Mortgage Lenders Association. (Source: https://www.nrmlaonline.org/about/press-releases/senior-home-equity-exceeds-record-11-58-trillion) Through a federally insured Home Equity Conversion Mortgage (HECM) loan, more commonly known as a reverse mortgage, seniors aged 62 and older can access their home equity, eliminate their monthly mortgage payments, and remain in their home long term. Reverse mortgage loan borrowers must own and occupy their home as their primary residence, pay all taxes and insurance, maintain the home and comply with all loan terms. AAG’s Retirement Crisis Survey was conducted in November 2022 and included over 1,500 participants. Responses include numerous formats, including yes-and-no answers, ranking preferences, and multiple-choice replies. The survey was conducted on a digital platform. Credit : AAG
Retiress will face a day of reckoning in 2023
Retirees will face a day of reckoning in 2023 The stimulus payments have stopped as inflation remains a persistent burden for all Americans. More concerning however is the impact of the Federal Reserve’s series of rate hikes on consumers who hold a credit card balance. Data collected by CreditCards-com shows the average general-purpose credit card APR is 22.66% and retail credit cards have reached an astounding 26%. Then there’s the average credit card balance carried by older Americans before the Feds rate hikes. Baby boomers carry an average balance of $6,000. The silent generation, those between the ages of 77-94 hold an average of $3,100 in credit card debt. The key words are average balance meaning each of these individuals is seeing higher interest rates which in turn slow down the payment of their principal balance. The demographics show the older generations are far from debt-free. In fact, adults aged 50-59 hold… Read Less 22% of total American credit card debt, the most of any age group. Those 60-69 hold approximately 17% of all credit card debt. The long-term effects of inflation and debt will have a significant impact on retirement savings. Allianz Life Insurance Company’s 2022 survey found 40% of baby boomers have reduced or stopped saving for retirement altogether. This means future retirees will be less prepared to retire and those that do may have to postpone retirement to ensure their nest egg lasts during their non-working years. The current debt crisis coupled with historic inflation leaves a handful of choices for older Americans. Find other sources of income, work longer, draw down 401(k) and IRA balances faster, or tap into other assets. Homeowners with significant equity may be able to pivot into a less vulnerable position by utilizing their home’s equity to boost their cash flow. The mere elimination of required mortgage principal and interest payments alone with a reverse mortgage can increase one’s cash flow by 25, 30%, or more! Not to mention paying off credit card balances which stops interest charges and further boosts one’s spendable income. When it comes to debt American consumers are particularly headstrong choosing to continue to spend despite dwindling savings; oftentimes by using their credit cards. Case in point- despite raging inflation and higher interest rates American online Black Friday spending hit a new record expected to top $9 billion in sales. The adage that all debt is bad is a worn-out trope. A more accurate representation would say the debt that eats away at your spendable income is the most onerous. Those burdened by consumer debt and who may qualify for a reverse mortgage will have a day of reckoning when their payments become unbearable or their credit lines are maxed out. Do I continue to suffer under the burden of high-interest debt and required monthly payments or do I look to other assets as a potential source of relief? When that epiphany finally hits depends on the individual’s tolerance for financial pain and their willingness to admit what potential solutions are at hand. Credit – Shannon Hicks
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How to Choose Between a Reverse Mortgage, Home Equity Loan, and Cash-Out Refinance When you own a home, you have equity in that property. You can access this equity by taking out a loan against the value of your home. There are three main ways to do this: a reverse mortgage, a home equity loan, or a cash-out refinance. So, which one is right for you? Reverse Mortgage A reverse mortgage is a loan that allows you to access a percentage of the equity in your home. The loan is repaid when the house is sold or the last borrower moves out of the house or passes away. With a reverse mortgage, you don’t have to make any monthly mortgage payments on the loan, and you get to live in the home. Reverse mortgages can be a great option if you want to stay in your home and take out the money upfront or in regularly scheduled monthly or quarterly deposits. They can also be an excellent way to get tax-free cash if you are a homeowner age 62 years or older. However, reverse mortgages have higher interest rates than conventional mortgages and home equity lines of credit, without any income or credit requirements. Home Equity Loan A home equity loan is a second mortgage on your home. You borrow a lump sum of money and then make monthly payments to repay the loan over five to 10 years. Home equity loans can have fixed interest rates, so your payments can stay the same for the life of the loan. Home equity loans can be a great option if you need a large amount of money all at once and plan to pay it back over a short period. However, home equity loans can be expensive, and you could lose your home if you fall behind on your payments. Cash-Out Refinance A cash-out refinance is a new first mortgage loan that pays off your existing mortgage and gives you cash to use as you need. With a cash-out refinance, you can borrow up to 80% of the value of your home. The interest rate on a cash-out refinance is usually lower than the interest rate on a home equity loan, and monthly mortgage payments are required. However, you will have to pay closing costs on a cash-out refinance. Cash-out can be a great option if you need a large amount of money and want lower monthly payments. The Bottom Line Reverse mortgages can be a great option if you want to stay in your home and avoid making monthly mortgage payments. Home equity loans can be a great option if you need a large amount of money all at once and can afford the monthly payments. Lastly, cash-out refinances can be a great option if you want lower monthly payments and can pay closing costs. Reverse mortgages, home equity loans, and cash-out refinances are all ways to access the equity in your home without selling or downsizing. All three options come at a premium and can be more costly than conventional mortgages and home equity lines of credit. Each has advantages and disadvantages, so depending on your appetite to make monthly mortgage payments, the importance of staying in your home, and the amount of money you would like to borrow, each option should be carefully considered to see which one works for you. So, which one is right for you? The answer depends on your needs and financial situation. You can speak with a financial professional to find out which option is best for you.
When is a Reverse Mortgage a good idea?
Although many Americans spend decades planning for retirement, the topic is often a source of anxiety. A study by the National Institute on Retirement Security reports that 56% of Americans are concerned about achieving a financially secure retirement, meaning they’re not sure they can afford it. A majority worry about running out of money. The good news is that many retirees have an asset they may not realize can supplement their retirement income or provide needed liquidity: their home. A Reverse mortgage can reduce monthly expenses and generate an income in one fell swoop. For people in the right circumstances, a reverse mortgage can be a good idea, offering access to cash flow that would otherwise be locked in their home. When Might a Reverse Mortgage Make Sense? Generally, a Reverse Mortgage may make sense when a homeowner wants to delay tapping into tax-advantaged funds such as retirement accounts to cover necessary expenses. A reverse mortgage has several advantages that can improve a retiree’s financial situation, including: Reduce Monthly Expenses Homeowners over 62 may qualify for a reverse mortgage, removing mortgage payments from their monthly budget. Eliminating that monthly mortgage payment can positively impact a retiree’s financial situation by reducing the amount of cash outflow and freeing up those funds for other things. That can reduce the need to draw don other retirement accounts, which can extend their useful life. That said, it’s important to understand a reverse mortgage does not eliminate home-related expenses, and borrowers are still obligated to pay property taxes, homeowner’s insurance, and any monthly dues associated with the home. They are also required to maintain the property. Generate Income A second instance when a reverse mortgage could make sense is when a retiree wants to use the funds currently tied up in their home. Serving as a line of credit, the borrower can use a reverse mortgage to pay current expenses or create a pool of money available for the future. Because a reverse mortgage is a type of loan, any proceeds are income tax-free. Delay Receipt of Social Security Benefits Relying on the proceeds of a reverse mortgage to pay expenses can also allow retirees to wait to start receiving social security benefits. The longer Americans wait to receive social security, the larger those monthly payments will be. Although payments can start at age 62, they can be as much as 30% lower than if the recipient waits until their Full retirement age. Income from a reverse mortgage can allow retirees to wait to receive those benefits. A financial professional can help you decide if this strategy makes sense for you. Make Gifts to Heirs or Fund Philanthropic Activities Although they may not need a reverse mortgage to cover living expenses, some retirees opt to apply for one to spread their wealth during their lifetime. That is, the motivation for taking a reverse mortgage may not be self-focused. Funding college educations or buying homes for children or grandchildren may be possible through the use of home equity. Taking that approach, retirees can enjoy seeing the impact of those gifts during their lifetime. When Is a Reverse Mortgage Not a Good Idea? For all the situations in which reverse mortgages are a good idea, there are also situations in which they aren’t. The following are some situations in which a different financial vehicle is most likely a better option. Existing Sufficient Assets When evaluating a retirement plan as a whole, it’s important to look at the diversity of assets. If a retiree has enough cash flow to maintain safe asset distribution rates, meaning 4% or lower, long-term care protection, and additional cash reserves, leveraging their home equity may not be necessary. Short Time Horizon A reverse mortgage may also not make sense if the retiree doesn’t plan to stay in their current home long-term. In that case, a reverse mortgage would need to be repaid before a move is made, including all the associated costs. A better decision may be to move and, if needed, secure a reverse mortgage on the new home. Ultimately, a reverse mortgage is likely most beneficial for a retiree whose home represents most of their net worth. Securing a reverse mortgage allows them to convert an illiquid asset into cash, to be used however they choose. With all major financial decisions, a qualified financial planner can help you weigh and understand your options. This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional. By Marcia Layton Turner
A Reverse Mortgage Can Generate Cash
A sharp rise in home values, combined with a shortage of single-family homes, has driven up home prices around the country, leaving senior homeowners with more than $11 trillion in home equity. If you’re planning to downsize, you can tap that equity right away and add the proceeds to your savings. But if you want to stay in your home, there’s another option: Take out a reverse mortgage line of credit as early as possible, homeowners are eligible at age 62. Reverse Mortgages: 10 Things You Must Know The line of credit will create a buffer during market downturns, providing a source of funds to pay expenses until your portfolio recovers. You won’t have to pay the money back as long as you remain in your home. In 2022, the maximum amount you can borrow using the government insured Home Equity Conversion Mortgage, the most popular kind of reverse mortgage, is $970,800, up from $822,375 in 2021.
What is a Reverse Mortgage?
A reverse mortgage is a loan for senior homeowners that allows borrowers to access a portion of the home’s value using the home itself as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately six months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining value in the home is inherited by the estate. Typically, the estate is not liable if the home sells for less than the balance of the reverse mortgage. Eligibility for a reverse mortgage To be eligible for a home equity conversion mortgage (HECM), or a reverse mortgage, the Federal Housing Administration (FHA) requires that the youngest borrower on title is at least age 62. If the home is not owned free and clear, then any existing mortgage must be paid off using the proceeds from the reverse mortgage loan at the closing. In addition, you must meet federal financial eligibility criteria. Paying it back A reverse mortgage typically does not become due as long as you meet the loan obligations. For example, you must live in the home as your primary residence, continue to pay required property taxes, homeowners’ insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure. Estate rules In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage or put the home up for sale. If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the estate. If the sale of the home is not enough to pay off the reverse mortgage, the lender (not the borrower) must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage. Loan limits The amount that is available generally depends on four factors: the age of the youngest borrower, current interest rate, appraised value of the home and government-imposed lending limits. Getting the money There are several ways to receive the proceeds from a reverse mortgage: Lump sum – a lump sum of cash at closing (only available for fixed-rate loans) Tenure – equal monthly payments as long as the homeowner lives in the home Term – equal monthly payments for a fixed period of time Line of Credit – draw any amount at any time until the line of credit is exhausted Or, any combination of the above Why not a home equity loan? Unlike a home equity line of credit (HELOC), a reverse mortgage does not require the borrower to make monthly mortgage payments and any existing mortgage or mandatory obligations must be paid off using the proceeds from the reverse mortgage loan. Many seniors use the remaining proceeds to fund medical expenses, make home repairs or just keep the extra cash in case of an emergency. In addition, a reverse mortgage line of credit cannot be reduced by the lender and any unused portion of the line of credit will grow over time. With a reverse mortgage the amount that can be borrowed is determined by an FHA formula that considers the age of the youngest borrower, the current interest rate, and the appraised value of the home. With traditional loans the homeowner is still required to make monthly payments, but with a reverse mortgage the loan is typically not due as long as the homeowner lives in the home as their primary residence, continues to pay required property taxes, homeowners’ insurance and maintains the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
5 ways to tap the equity in a home you have paid off
These are the five main ways you can get cash out of a house you own free and clear. 1. Cash-out refinance A cash-out refinance is a new mortgage. You take out a loan larger than the amount you still owe (which is zero in the case of a home you own free and clear), and you receive the balance in cash at closing. This option is good if you want to take out a significant amount of money. The total you’re allowed to receive in cash may depend on your lender. As a general rule of thumb, you can’t receive more than 80% of your home’s value in cash. You’ll also have to pay closing costs. 2. Home equity line of credit (HELOC) With a HELOC, you receive a revolving line of credit instead of a lump-sum loan amount, where you can borrow money over time. The interest rate is variable, so monthly payments on the principal amount borrowed may fluctuate as well. If you want to borrow money as you go and you don’t mind a variable interest rate, a HELOC can be a good option. However, your “home is used as collateral so if your financial situation deteriorates, it could put your home on the line,” Shirshikov notes. 3. Home equity loan A home equity loan allows homeowners to borrow against the value of their home. Most lenders will let you borrow up to 80% of what the home is worth. If the cash you need is less than the 80% of the home’s value, the home equity loan is the “less expensive option than the cash-out refinance, since there are less, if any, closing costs,” says Shirshikov. Home equity loans offer fixed interest rates with consistent monthly payments. 4. Reverse mortgage A reverse mortgage is for homeowners age 62 or older who can borrow a lump sum that is paid back in monthly installments, or as a line of credit against the equity in the home. In a reverse mortgage, when the home is eventually sold, proceeds from the sale will go to the lender to pay off the balance of your reverse mortgage. Any money remaining will go to you or to your estate. If your heirs want to keep the property, then they can pay off the reverse mortgage themselves. 5. Shared equity investment A relatively new option is a shared equity investment. “A lender will pay you a lump sum of cash for a share of equity in the house,” explains Omer Reiner, president of real estate investment company FL Cash Home Buyers, LLC. “You can keep controlling interest in the house, but you may give up growth in equity of the home in the future” The key benefit of home equity sharing is that it’s not a debt. There aren’t any payments or interest, and you can use the money however you want. However, it can also cost you big if your home appreciates a lot over the course of your agreement’s term. “Let’s say a homeowner gives up 25% equity and the house grows $100,000 in value,” says Reiner. “The owner keeps only $75,000.” Most equity sharing companies also require you to pay them back in one single payment at the end of your term. The bottom line Before tapping into your home equity, consider all the options carefully and fully understand the terms and conditions for each. “Homeowners should never take out a mortgage unless they know what the financial stipulations are,” says Johnson. “They should consult a lawyer, and potentially an accountant if they have additional questions, especially legally binding ones.”
Helping older homeowners enjoy their retirement
Helping older homeowners enjoy their retirement A reverse mortgage can be an effective financial tool to supplement retirement funds. Here are some of the ways this loan can offer you the financial resources you need to age on your own terms: Continue to grow their investment portfolio The impacts of inflation and an unstable market are a huge concern – and taking withdrawals now can wreak havoc on the health and longevity of their investment portfolios. But by using the funds from a reverse mortgage, you can use the equity in your home and keep your assets invested. Help combat inflation The perk of opening a reverse mortgage line of credit early is that your client may borrow more now. If part of the loan is held in a line of credit, the unused portion will grow each month at a rate that is equal to the sum of the interest rate, plus the loan’s annual mortgage insurance premium rate. Delay Social Security benefits As of January 2022, the maximum benefit for someone of full retirement age this year is $3,345 per month. While Social Security benefits can be claimed as early as age 62, collecting them before full retirement age may result in reduced monthly benefits for the rest of that individual’s life – even after he or she reaches full retirement age. Finance expenses and goals The loan proceeds can be used however you deem necessary – to pay for home renovations, vacations, health-related expenses, in-home care and so much more. Think of all the ways these funds can help create a more fulfilling and enjoyable retirement. Reverse mortgages have the potential to dramatically improve the quality of life of your older customers. Reach out with any questions on how I might be able to help you enjoy your retirement better.
There are several strategies you might wish to consider for improving your cash flow in retirement. One is the reverse mortgage. Although retirees desiring more cash flow may be attracted by reverse mortgages, they should proceed with care. Consider these scenarios: * Short stay. Suppose Dan takes out a reverse mortgage and has to move to a smaller place a year later. The loan repayment will be due so Dan will have paid substantial upfront costs for a modest amount of cash flow. * Long stay. On the other hand, suppose Dan stays in the house for 20 years. The loan balance will keep compounding. When the house is ultimately sold to repay the debt, there may be very little equity left in the house. Thus, a reverse mortgage might make sense if someone has a need for cash, a desire to keep living in the house, and other assets to leave to loved ones. The healthier you are—and the more likely to remain at home for several years—the more appealing a reverse mortgage might be.