5 Ways Retirees Can Prepare for a Recession…in Reverse
Advertisement If there’s one thing that can upend retirement plans, it’s a recession which an increasing consensus of economists are predicting for the US economy. Indicators like a weakening labor market, stubbornly high inflation, and declining manufacturing activity all point to a potential economic slowdown. So, how can retirees or those nearing retirement brace for impact? Let’s examine the five most common strategies economists and financial columnists suggest for retirees to best prepare for a recession and how a reverse mortgage could play an important role. 5 Ways to Prepare for a Recession 1. Boost Your Savings. For older Americans nearing retirement, it’s essential to have sufficient savings to handle unexpected challenges. For those still working, the biggest threat might be an unforeseen layoff. Having enough savings to cover expenses while applying for unemployment or searching for a new job can mean the difference between a financial crisis or a temporary setback. Solution: A reverse mortgage could offer a lifeline for those aged 55 and over. It allows homeowners to access their home’s equity, potentially eliminating the need to find new employment. Even if they choose to keep working, a reverse mortgage can free up money by eliminating monthly mortgage payments, which can be redirected into savings or investments during their working years. 2. Pay down debt. Debt is the bane of retirement. The burden of monthly payments saps away at a retiree’s quality of life or could prevent one from retiring altogether. As Dan Hultquist highlighted in a recent interview, strategies like the debt snowball method can help pay off debts faster. However, a more effective approach may be a “debt avalanche,” which pays down high-interest debt first. However, a debt avalanche could be employed by transforming high-interest debt into a payment-optional HECM Consolidation Loan. Solution: Older homeowners struggling with debt may benefit from consolidating it into a reverse mortgage, which can eliminate the burden of monthly payments. This can provide much-needed financial relief by eliminating the burden of mandatory mortgage payments. 3. Build an Emergency Fund to Ride Out Market Downturns What could go wrong with a stock portfolio in a recession? A lot. As AARP pointed out in its June 2022 blog, retirees should aim to have a cash reserve that covers up to a year’s worth of expenses. This fund can help them avoid selling investments in a down market or shortening their sustainable withdrawals Solution: A HECM (Home Equity Conversion Mortgage) line of credit could accomplish the same thing allowing a retiree to tap into funds as needed and avoiding the sequence of returns risk inherent in selling equities in a down market. 4. Diversify Your investments Diversification is a key principle for any retirement portfolio, especially as one approaches retirement. This typically means spreading investments across different asset classes to minimize risk. But for many retirees, their largest asset is their home, which is often not factored into diversification strategies. Homeowners measure their home’s worth by its market value and accumulated equity. The rub is that home equity is neither safe nor accessible until the homeowner sells the home or separates some of the equity with a mortgage loan. Solution: A HECM is especially well suited to secure a significant portion of home equity with a variety of payout options. For example, a HECM borrower with a $120,000 line of credit for their home which appraised at $550,000 doesn’t have to worry about qualifying for a future cash-out refinance or HELOC if home values fall. They’ve already secured access to part of their home’s value outside of future market fluctuations or changing credit conditions. 5. Create Consistent Monthly Income with an Annuity Many retirees turn to annuities to generate steady monthly income. With annuities, individuals contribute either a lump sum or make premium payments over time. Later the retiree can receive monthly payouts during the annuitization phase, either for life or for a fixed period. Solution: A Home Equity Conversion Mortgage (HECM) can function in much the same way. A homeowner could leave their HECM line of credit to grow and later convert it to monthly tenure payments or term payout for a fixed number of years. Conclusion While recessions are an inevitable part of the economic cycle, their effects can be particularly tough on retirees or those nearing retirement, who may have limited time to adjust. Fortunately, homeowners can take proactive steps to protect their finances, and one of the most powerful tools available is a reverse mortgage. By unlocking the equity in their homes, retirees can navigate economic downturns with greater confidence and financial flexibility. By Shannon Hicks, September 10, 2024
More seniors turning to reverse mortgages amid Louisiana’s insurance crisis
THE SAME CAN BE SAID FOR FLORIDA !!! NEW ORLEANS (WVUE) – With property insurance costs in Louisiana spiraling out of control, seniors are increasingly turning to reverse mortgages for financial relief. Alison Calamaia at America’s Mortgage Resource says she’s been getting more calls from homeowners asking about reverse mortgages. “A lot of my calls start with clients asking about whether or not they should get a reverse mortgage,” said Calamia. “My next question is why are you calling? What has occurred that made you make this phone call? Currently, they say my insurance just went through the roof.” A majority of Calamia’s clients are in their golden years and on fixed incomes. She says the soaring cost of homeowners insurance creates a financial burden many of them can’t afford because they never anticipated the price of insurance premiums to climb so high. “I currently have a woman right now, her insurance went from $3,000 to $14,000. She can’t afford to pay that any longer,” she said. “She does have a mortgage on her property, and she might lose her house if she can’t make that mortgage payment.” Even those without mortgages, like Cheron Brylski of Uptown New Orleans, are feeling the pressure. Brylski put her home up for sale earlier this summer, citing property insurance and taxes as key reasons for her decision. “It’s basically making living in a house that I own, and I own outright, impossible for me to stay here,” Brylski told us in June. Calamia said the fear of losing one’s “forever” home is becoming more common among her clients. “Most of the time it’s the house where they raised their children. And we live in the South. We don’t want to leave that house. We want to stay put,” she explained. INSURANCE CRISIS To stay put, Calamia says a growing number of people are considering reverse mortgages to create another line of money. Details of mortgages and reverse mortgages can be confusing and often filled with financial language unfamiliar to many people. That can often lead to several myths about reverse mortgages said Calamia, who tried to boil down the information for this reporter to understand. “In a nutshell, it is a mortgage against the home that allows for a percentage of the property value to be used as a stream of monthly income, a line of credit, or a lump sum to pay existing mortgages, but it does not come with a monthly payback as long as the borrower lives in the home. They do have to pay taxes and insurance, but there’s not that principal and interest part of it. In essence, the house is going to pay for the principal that they would receive and the interest on it over time instead of physically making a traditional mortgage payment, the house is paying for it,” said Calamia. The borrower can use the line of cash or credit generated through a reverse mortgage to pay for things like property insurance. Calamia says reverse mortgages often get a bad reputation. Much of her work involves walking clients through a process to determine if a reverse mortgage would be appropriate for their financial situation. “One of the biggest reasons myths about reverse mortgages is I can’t get a reverse mortgage if I still owe money on my home. That’s not true. However, in a reverse mortgage the available funds, which is a percentage of the property value, there needs to be enough in the reverse mortgage to pay off that mortgage plus cover the closing costs. We don’t have any out-of-pocket cost so the cost of getting the loan is worked into the loan. People also think they won’t keep the title to their home. They do keep that title as long as they just live in it. And one day, when the mortgage is due and payable, which is usually after the borrower has sold the property or has permanently moved out of the home. When the loan becomes due and payable, any amount that was given to the borrower is paid back along with interest on it over time. There’s no end date. The date is when they no longer live there usually after death,” Calamia said. Reverse mortgages may not be suitable for everyone. But during a time when many people are trying to find ways to cover the cost of sky-high property insurance, Calamia believes it can help seniors stay in their forever homes. By Thanh Truong Published: Sep. 6, 2024
What is a reverse mortgage, and how does it work?
If you’re 62 years or older, you might be eligible for a reverse mortgage. These types of mortgages aren’t for everyone, since they take equity out of your home and must be paid back when you sell the home or die. For example, a reverse mortgage probably isn’t a good idea if you’re planning to pass your home onto your heirs. But for some borrowers, having the ability to take money out of their house and use it to supplement their income can make a reverse mortgage a very useful tool. What is a reverse mortgage? A reverse mortgage is a type of home loan only available to people aged 62 or older. It’s for people who have gained a lot of equity in their home since originally buying it and may even have fully paid off their mortgage already. A forward mortgage — which you probably think of as a regular mortgage — is a type of loan you’d use to buy a home. You make monthly payments to the lender until the home is paid off, A reverse mortgage, on the other hand, is used after you’ve already bought the home. The lender pays you, and the money comes out of the equity you’ve acquired in the house. Over time, your debt increases. A reverse mortgage is not the same thing as a home equity loan or a home equity line of credit. All three are tools for tapping into your home equity, but they operate differently. How does a reverse mortgage work? How much you’ll be able to borrow depends on your age, the current interest rate of the loan, and how much your home is worth. The money you get from a reverse mortgage is tax-free. The IRS sees it as a loan, not as taxable income. When the home is eventually sold (whether you’re living or dead), the proceeds go to the lender to pay off your debt from the reverse mortgage. Any additional money from the sale will go to you if you’re living, or to your estate if you’re dead. If your heirs want to keep the property, then they can pay off the reverse mortgage themselves. The 3 types of reverse mortgages Home equity conversion mortgage (HECM) This is the most common type of reverse mortgage. HECMs are a type of government-backed loan, meaning you’ll get it through a private lender and a federal agency (in this case, HUD) will insure it. Since they’re the most common type of reverse mortgage, most of the specific guidelines we mention in this article are referring to HECMs. Other types of reverse mortgages have requirements that are set by individual lenders, not the government, so they can vary a lot. Proprietary reverse mortgage With a proprietary reverse mortgage (also known as a jumbo reverse mortgage), you borrow an amount that exceeds the HUD limit. This could be the case if your home is worth a lot of money and you’ve either paid off the original mortgage or have a low amount left to pay. Proprietary reverse mortgages aren’t backed by the government. You’ll get one through a private lender. These reverse mortgages sometimes have lower age limits than HECMs; borrowers as young as 55 may qualify, depending on the lender. But they’re often more expensive. Single-purpose reverse mortgage A single-purpose reverse mortgage only allows your funds to be used for one thing. For example, the lender may tell you the money can only go toward home repairs or property taxes. These types of reverse mortgages are offered by some nonprofit organizations, or by local or state government agencies. They’re typically very affordable and enable older homeowners to keep up with their homes, make necessary home repairs, or afford their property taxes. But these loans can be hard to find. Who qualifies for a reverse mortgage? Reverse mortgage requirements Age requirements You must be 62 or older to get a HECM reverse mortgage. If you live in the home with your spouse, then ideally, you’d both be at least 62 years old. But you do have options if one spouse is younger. If you’re the older spouse, then you can be the sole borrower of the reverse mortgage. Your spouse will be referred to as the “non-borrowing spouse.” In this case, though, your younger spouse could lose the home if you die first, or have to pay off the mortgage when you die to avoid selling the home to pay off the lender. Depending on the situation, your spouse might be able to keep living in the home after you die, but they would no longer receive the mortgage payments. Talk to your lender or a Department of Housing and Urban Development counselor about your options if your spouse is under age 62. Credit requirements HUD says that when you apply for a reverse mortgage, the lender will look at your income, assets, expenses, and credit. But there’s no minimum credit score requirement for these loans. They will make sure that you’ve been paying your taxes and insurance on time, though, and that you can continue to do so. You can’t have a mortgage with a large balance on the property. You’ll generally need to have at least 50% equity in the home, meaning you can’t have a mortgage for more than half of what the house is worth. Property type Properties that are eligible for a reverse mortgage backed by HUD include: Occupancy requirement Reverse mortgages are only available on primary residences. You can’t get a reverse mortgage on a second home or investment property. Mandatory counseling Prospective reverse mortgage borrowers must meet with a HUD-approved counselor. Reverse mortgage loan limits The maximum loan amount for reverse mortgages allowed by HUD is $1,149,825 in 2024. But you may not be able to borrow this much. The amount you’ll be approved for depends on the age of the youngest borrower (or non-borrowing spouse), your current rate, and what your house is worth. Ultimately, the amount you’ll be approved for will only be a portion of your home’s total
Would a Reverse Mortgage Work for You in a Gray Divorce?
Editor’s note: This is part seven of an ongoing series throughout this year focused on helping older adults navigate the financial difficulties of gray divorce. See below for links to the other articles in the series. The subject of reverse mortgages is often met with skepticism from clients. A person going through a late-life divorce might even be perplexed by how a reverse mortgage might offer a potential solution to the financial stress of divorce. I understand. Until recently I always associated reverse mortgages with late-night television infomercials, a product pitched by actors like Tom Selleck or Henry “The Fonz” Winkler. I had always lumped them in as something that was sold like a timeshare, variable annuities or indexed universal life insurance. My research working with Certified Divorce Lending Professionals (CDLPs) and older divorcées has convinced me that the reverse mortgage can solve some key problems in gray divorce. Most, but not all, reverse mortgages today are federally insured through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) Program and are available for homeowners ages 62 and up. Let’s review the key features of a HECM and how it might benefit late-life divorcées. No monthly mortgage payment HECM borrowers are not required to make monthly mortgage payments. The loan, which grows over time, is repaid when the homeowner sells the house, moves out or passes away. This can reduce financial strain for divorced clients living on a fixed income or facing uncertainty about future cash flow. Unlike traditional mortgages, the borrower’s income and credit score aren’t as important as their age and equity in the home. Borrowers with lower credit scores may have to pay a higher interest rate. Home equity access Divorce usually involves dividing assets, including the marital home. Reverse mortgages allow older homeowners to convert part of their home equity into tax-free cash, helping divorcées who need liquid assets to buy out their spouse’s share of the marital home or to fund new living arrangements without selling the home. To qualify, in addition to being 62 years of age or older, you must own your home fully or have a low mortgage balance and meet HUD’s financial requirements. Additional income stream The proceeds from a reverse mortgage can supplement income, helping to cover living expenses and health care costs. A divorced person may have had their net worth cut in half in divorce. The HECM helps preserve those investment assets by eliminating mortgage obligations. Those assets can be used to generate income from investments. Eligible borrowers qualify to receive disbursements either as a lump-sum payment, monthly payment or line of credit. Non-recourse loans Insured by the FHA, HECMs are non-recourse loans, meaning that the borrower or their estate will not owe more than the value of the home when the loan is repaid. The FHA guarantees that the loan will be repaid if it ever goes into default, so lenders are willing to offer HECM loans with low interest rates and flexible terms. The HECM has been reformed over the years. One reform restricts the amount of funds available to a borrower, and another introduced underwriting requirements through a financial assessment. These reforms have coincided with a reduction in the rate of tax and insurance default before and after the reforms. Bruser notes, “The HECM program has improved dramatically over the last 15 to 20 years, to ensure its longevity and utility for our aging population. After a basic consultation, a lot of the stigma goes away.” Consider two potential solutions the HECM may solve for homeowners getting divorced later in life: 1. The marital home remains with one spouse. A HECM on the marital home can provide the necessary funds for the departing spouse’s down payment on a new home. John Drennen, a Certified Divorce Lending Professional with VIP Mortgage in Las Vegas, says, “Let’s say we have a 70-year-old couple divorcing with a free and clear house and the man wants to stay in the house, and he doesn’t have a lot of income. He can do a reverse mortgage to access the equity in the house to give to his wife, who can use that money as a down payment on the purchase of a place for herself, possibly using a HECM for the purchase of her new home. Neither spouse is saddled with debt-service obligations, and there’s no forced sale of the marital home.” 2. The marital home is sold. In this case, the proceeds would be divided. Each spouse could then use their share of the proceeds toward the down payment on a new home purchase and then use a home purchase HECM to pay the rest. Once again, neither spouse has a debt-service obligation. Nor is there the need to draw down liquid assets from bank or investment accounts. Drennen notes an even more creative option where one spouse purchases a duplex or a fourplex with a HECM and lives in one unit and rents out the others to boost cash flow. When a reverse mortgage isn’t a good idea Of course, a reverse mortgage is not always advisable. If the homeowner plans to move soon, the upfront costs involved in setting up a reverse mortgage loan may not make sense. While the HECM may provide more options than a traditional mortgage, including no mortgage payments and potential growth of a credit line of unused funds, the reverse mortgage is still more expensive than a traditional mortgage. Also, if the homeowner is intent to leave an equity-rich home to their heirs, they may want to consider alternative arrangements. Another consideration is eligibility for government benefits. While the proceeds from a reverse mortgage are not considered taxable income, they can affect eligibility for certain government assistance programs, such as Medicaid. It’s important to understand how a reverse mortgage might impact eligibility for these benefits. Drennen, pointing to the common misconception that with a reverse mortgage you no longer own your home, suggests homeowners reframe their approach: “When you buy a car, do you go and tell your best friend, ‘Hey, I just financed a
Half of American boomers risk running out of money in retirement — here are 3 ways to stick it to that stat
Listen Baby boomers may be in trouble when it comes to retirement. A recent Morningstar study found that 52% of Boomers risk running out of money during their later years, more than other generations. This is partly due to the short time they have left to save and their small account balances. Morningstar’s analysis suggests boomers (and Gen Xers) got caught in the transition between defined benefit and defined-contribution–dominated systems. Additionally, most boomers didn’t grow up in a 401(k) world and, without modern-day incentives such as auto-enrollment, their savings fell short. Whatever the reason, many boomers are now facing a rough retirement. But all hope is not lost. If you’re a boomer worried about emptying your accounts too soon, here are three ways to beat the odds and live a more comfortable retirement. Delay retirement for a few years If you’re nearing retirement with too little invested, working longer is the most obvious solution. Staying in the workforce longer can improve your future financial security in the following ways: *You’ll have more time to save money *You can delay claiming Social Security, which increases your benefit *You won’t need your savings to support you for as long Let’s say you’re a 63-year-old boomer. If you can put off retirement until 67, you’ll be able to claim your Social Security at your full retirement age and get your standard benefit unreduced by early filing penalties. You’ll also have another four years to save. If you can manage to put away around $10,000 a year during that period (including your employer match) and earn a 7% average annual return, you could grow your account by approximately $44,000. That’ll give you another $1,700 per year in annual income, which isn’t nothing. If you can work until 70, you’ll fare even better. You can boost your standard Social Security benefit by 24%, earning delayed retirement credits if you claim after FRA. Plus, with $10,000 a year invested over 7 years, you could add over $85,000 to your nest egg. Discover How a Simple Decision Today Could Lead to an Extra $1.3 Million in Retirement Learn how you can set yourself up for a more prosperous future by exploring why so many people who work with financial advisors retire with more wealth. Discover the full story and see how you could be on the path to an extra $1.3 million in retirement. Cash in your equity Many boomers are coming up short in their retirement accounts, but are rich in real estate. This generation collectively owns homes with a combined value of $18 trillion, according to Redfin. If you own your home outright or even have a lot of equity, you may be able to sell, buy a cheaper home with cash (to avoid today’s high mortgage rates), and add a large lump sum to your retirement funds. In theory, you also have the option to take a reverse mortgage. This would allow you to tap into equity without having to move out of your home. However, reverse mortgages often come with high fees, which can make it difficult to leave your family home to loved ones. They are not the best choice for most retirees, so explore your other options before considering one. If you want to keep your home but need a little extra cash flow, consider renting out a room or even taking a more creative approach, such as signing up for apps that allow you to charge people for borrowing your swimming pool or storing stuff in your garage. Be strategic about where you retire Finally, if you’re worried about making a small nest egg last, consider retiring to a more affordable location. Some areas are far less expensive to live in than others. Some locales also have more favorable tax rules for retirees, including no taxes on pensions or Social Security benefits. By reducing your living costs, you can preserve your savings by taking out less money each year. If you can work a bit longer, save a bit more and live some place that costs you less, you should be able to add your name to the list of boomers whose money is likely to last for life. By Christy Beiber
44% of Homeowners 62 and older still have a mortgage
According to the most recent data, about 44% of Americans aged 62 and older still have a mortgage payment. This percentage has increased over the past few decades, reflecting a trend where more older adults are carrying mortgage debt into retirement. Is carrying a mortgage into retirement truly a trap? Today, let’s examine when making mortgage payments is not detrimental and when it unnecessarily undermines one’s quality of life in their non-working years. For decades conventional retirement planning assumed retirees would pay down their mortgage and retire mortgage-free—a great strategy if retirees avoid financial shocks or unexpected interruptions of income or suffer investment losses. But then life happens. Then what? USA Today reports the share of Americans ages 75 and over who are carrying mortgage debt has risen steadily for decades, according to the Federal Survey of Consumer Finances: from 5% in 1995 to a historic high of 25% in 2022. Not only has the number of older Americans carrying mortgage balances increased, but so has the median mortgage balance. The survey reveals median mortgage balances for homeowners 75 and older have grown from $14,000 in 1995 to $102,000 in 2022. According to the 2019 American Housing Survey (AHS) conducted by the U.S. Census Bureau, the median monthly housing cost for homeowners aged 75 and older was approximately $500, which includes mortgage payments, property taxes, insurance, utilities, and maintenance. However, many have a much higher payment having refinanced their home one or more times. The Michigan Retirement and Disability Research Center at the University of Michigan found the typical retiree lacks the funds to cover their mortgage debt. That is highly problematic as researchers found retirees with larger mortgages face increased financial peril. Households with more mortgage debt tend to postpone retirement and spend less money once retired, Why are so many retirees still paying a mortgage? Recent data from the National Association of Realtors may hold the answer. It shows the typical first-time buyer last year was 35, while the average repeat buyer was 58. Baby boomers appear to be more comfortable taking on mortgage debt in later life than their older counterparts When does having a mortgage in retirement make sense? When carrying a mortgage doesn’t put a strain on monthly cash flow to cover monthly payments and there are few other debts. “It’s always a function of cashflow,” said Erika Safran, a certified financial planner in New York. Fortune.com notes those who purchased or refinanced a mortgage in a low-interest-rate environment may want to keep their mortgage in place and invest their money. Stock market returns averaging 6.5-7% would exceed the 3-4% accrued interest they would save by paying off the loan. However, there are several instances where eliminating a mortgage makes sense. Homeowners with a considerable amount of non-mortgage debt may find relief in eliminating their mortgage payments. Also, those facing a potential reduction in household income from a pension or Social Security after the death of a spouse may want to consider reducing their monthly debt burden. “We can’t predict the future and never know when the unexpected could happen. Therefore, it’s important to plan for the worst-case scenario and determine whether you’ll be able to pay for your mortgage during those times. If funding one would be a challenge for you, then you shouldn’t carry it into your retirement”, says Courtney Myers, a financial advisor with Thrivent Financial. All this brings us to how one may eliminate mortgage payments. The first is to sell and downsize. If the homeowner has substantial equity in a large home they may be able to purchase a smaller home with a much lower mortgage payment. Another option is to sell and rent- an unpopular choice for homeowners who’ve enjoyed the security of fixed housing costs. But what about reverse mortgages? The University of Michigan’s research only mentions reverse mortgages once. “The lack of a robust market for reverse mortgages and restrictions on home equity loans and lines of credit make it difficult to eat one’s house”. That’s it. No examination of the improvement to a reverse mortgage borrower’s cash flow or peace of mind in retirement. J. Mark Iwry, a nonresident senior fellow at the Brookings Institution told USA Today, that this omission “begs the question, what about reverse mortgages, and why aren’t they a reasonable part of the solution?” One suggested answer was ‘persistent reputational issues with the loan- a point USA Today drove home in its 2019 expose on reverse mortgages. So here we have a top-tier university research department examining one of the pivotal questions of retirement that don’t fully explore all options for eliminating one’s mortgage payment in retirement. Such an approach while perhaps avoiding criticism from fellow academics falls short of providing a full analysis of all the options older Americans presently burdened with a mortgage payment may have. By Shannon Hicks
Why More Older Mortgage Applicants Are Denied Credit
Three Reasons Older Mortgage Applicants are Denied Many Americans jumped on the opportunity to harvest some of their home equity as values skyrocketed in the wake of the COVID-19 pandemic. Yet, many older homeowners’ applications for a Home Equity Line of Credit (HELOC) or cash-out refinance were rejected. While the Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against credit applicants based on age, there are exceptions in denying credit based on numerous factors including age. Here are four reasons older credit applicants have a higher rejection rate than younger cohorts. A Stable & Predictable Income Lenders love borrowers with predictable and stable sources of income. While Social Security is certainly one source of consistent income during an individual’s lifetime it’s not necessarily for a surviving spouse. For example, what happens if a married couple receives individual Social Security payouts and one passes away? Unfortunately, you cannot claim both your deceased spouse’s benefits in addition to your own. In such instances, Social Security will pay out the larger of the two monthly payments if the survivor has their own Social Security retirement benefits. Usually, this works in the favor of a widow whose husband earned significantly more than his wife and contributed more over his working years. This is just one example when retirement income can be significantly reduced impacting an applicant’s loan approval. Then there are pension survivor benefits. Defined pension plans typically offer plan participants the option to choose a payout plan at retirement. Typically, a full pension payout of 100%, 75%, or 50%. A retiree wanting to ensure their spouse receives a full monthly payment will receive lower monthly payments during their lifetimes in exchange for income security. However, my experience has shown me many couples opt for a 50-75% survivor benefit to maximize their monthly pension benefit not considering what lies ahead should their spouse have their monthly income reduced by 25% or more. Retirement savings invested in the stock market must account for fluctuations in value as any loss of principal could impact the income taken from their portfolio. Substantial portfolio losses often prompt retirees to reduce their withdrawals reducing their cash flow. Debt-to-Income Ratios Poor spending habits don’t stop in retirement. If anything, they’re a reflection of an individual’s approach to money management during their working years. Consequently, some applicants have accumulated significant credit card debt or perhaps recently refinanced their home straining their ability to increase their monthly debt payments. A higher DTI gives lenders pause in approving a loan. Age (Mortality Risk) Yes, under certain circumstances lenders can consider an applicant’s age for long-term loans such as a mortgage or a HELOC. A 75-year-old seeking a new 30-year cash-out refinance mortgage may find their lender reluctant to approve the loan as it is unlikely they would live until the ripe age of 105. The Equal Opportunity Credit Act states, “While a creditor cannot reject an application or terminate an account because an applicant is 60 years old, a creditor may consider the applicant’s occupation and length of time to retirement to determine whether the applicant’s income (including retirement income) will support the extension of credit to its maturity.” In addition, a borrower’s death is inconvenient and costly for the lender said Alicia Munnell with the Center for Retirement Research. BY Shannon Hicks
7 Reasons to Use Home Equity
Due to persistent inflation over the past few years, borrowing costs are at record levels. The average interest rate on credit cards assessed interest is 22.76%, according to the latest data from the Federal Reserve. This represents an increase of over 6% in the past four years. That said, one bright spot if you’re a homeowner is that although home equity rates have risen, they remain much lower than rates for credit cards. Two popular ways to use your equity include home equity loans and home equity lines of credit (HELOCs). If you need to borrow money, here are seven popular reasons to use your home’s equity. Vaults Viewpoint 1. Home Renovations and Improvements One of the most popular reasons to use home equity is to pay for home repairs. Home improvement projects can spruce up your living space and some renovations (kitchen and bathroom remodels, for example) may even increase your home’s value. Plus, another pro is that if you itemize your taxes when you file, you could deduct the interest paid on a home equity loan or HELOC. Pros Cons 2. Consolidating Debt If you’re struggling to pay off credit credit debt (or other high-interest debt), consider using your home equity to refinance. Paying off debt with a home equity loan or HELOC could save you thousands on interest since they often come with more favorable rates. However, keep in mind that if you refinance to a longer-term, you could end up paying more interest over the life of the new loan. Pros Cons 3. Emergency expenses If you don’t have an emergency fund—or an unexpected expense would exhaust your savings—tapping your home’s equity is one solution. It’s likely a cheaper solution than using a credit card, unless you can qualify for one with a 0% APR promotion. However, there are some drawbacks to consider. For example, depending on the lender, it can take up to three weeks to receive home equity loan funding. As a result, it might not be the best choice if you need funds immediately. Pros Cons 4. Covering Major Purchases Taking out a home equity loan or HELOC could also help you pay for major life events, such as a wedding or a trip for a milestone birthday. However, you may want to think twice before you put your home on the line to cover an unnecessary expense. Only pursue this route if you can comfortably afford to repay the loan. If you default on the loan, a lender can take your home. Pros Cons 5. Funding Education Another reason to use your home’s equity is to cover your (or your children’s) education expenses. If you can secure a lower rate than a student loan, it could be a wise choice. Plus, it could make sense to use your home’s equity to fund your education if you’ve exhausted your federal student loan limits. Before you take this route, explore all of your options (starting with federal loans). Unlike federal student loans, a home equity loans and private student loans don’t come with access to student loan forgiveness programs and income-driven repayment plans. Pros Cons 6. Retirement Planning If you need help covering expenses during retirement, using your home equity could help. You could take out a home equity loan or HELOC to cover medical bills or everyday expenses. However, using a home equity loan or HELOC might not be ideal if you’re on a limited fixed income. That’s because you may struggle to repay the debt. If you’re looking to supplement your retirement income, consider a reverse mortgage. Unlike a traditional mortgage, the lender gives you a lump sum of money or pays you in installments. You then repay the lender the original amount, including interest, when you sell the home or pass away. Before you take one out, though, make sure you understand the pros and cons of a reverse mortgage. While it can provide much-needed income, it can make it more difficult to pass down a home to your heirs. Plus, if you fall behind on paying your home insurance or property taxes, a lender can foreclose on your home. Pros Cons 7. Investing in Real Estate You could also use your home’s equity to put a down payment on an investment property. Note that this only makes sense if the return you can get from your investment exceeds the borrowing costs on your loan. Pros Cons When to Use Your Home’s Equity Borrowing against your home’s equity could be a smart financial move if you think the benefits outweigh the drawbacks. For example, while tapping your equity could be the cheapest option, you could lose your home if you don’t repay the loan. If you need help deciding whether it’s right for you, contact a financial advisor who can provide advice based on your complete financial picture By Jerry Brown
We’re in our mid-50s and planning to retire soon. We have $2 million saved. How can we extract income from our $900,000 home?
‘We have no children or heirs, and have no one to leave our estate to other than charitable causes’ Dear Big Move, We’re a couple set to retire early in the next few years. We are in our mid-50s. We will have about $2 million in assets by then, which includes $500,000 of savings and taxable funds to live on until we can tap our retirement funds. Our home is worth an additional $900,000, and we are staying put for life. We have no children or heirs, and have no one to leave our estate to other than charitable causes. How might we leverage our home to generate some additional “free income” in retirement? What are the best ways to do this? Any pitfalls to avoid or ways to protect ourselves? We don’t necessarily need the money, but if we can generate a basically free annuity stream while we live in our house, why not do so? Dear Ready, Congrats on building a significant amount of savings for your soon-to-come early retirement. Saving up $2 million and buying a home that is now worth $900,000 must not have been an easy feat. It’s also exceptionally impressive, given that the median amount that people aged 55 to 64 have saved is about $185,000, according to data from the Federal Reserve’s most recent Survey of Consumer Finances. While you likely already know what options you have to extract that equity in your home, which you are considering perhaps as a way to build a financial buffer in your retirement, you might be surprised to learn the fees and costs associated with such plans. And for that reason, it Home-equity line of credit Two options for that is to look at a home-equity line of credit, and a reverse mortgage: A HELOC refers to a type of revolving credit that is secured by your home. Think of it as a credit line, like a credit card, that is secured by your house. It’s like a second mortgage that gives you access to cash, based on the value of your house minus the amount you owe on your mortgage (if you still have an outstanding balance). You draw on this line of credit, and repay some or all of it monthly, just like a credit card. You typically have a set period of time to withdraw cash from a HELOC. With a HELOC, “you can borrow as much or as little as you need up to your credit limit and pay interest only on what you actually use,” Peter Mallouk, CEO of Overland Park, Kan.-based Creative Planning, an investment advisory services company, told MarketWatch. The downsides of a HELOC are that rates are relatively high, and they are also variable, which means you could end up with a sharp increase in payments if interest rates were to increase. You might also have to pay upfront costs, warns the Consumer Financial Protection Bureau, such as a property-appraisal fee, or an application fee, or closing costs, and more. Though there are fees involved, HELOCs “are usually very low cost relative to other borrowing options,” Mallouk said. Reverse mortgage The other option you have is a reverse mortgage. Reverse mortgages refer to a type of financial product catered for people aged 62 and over. They turn the equity in your home into income to help you with retirement, according to Rocket Mortgage. Provided you meet the necessary requirements for a reverse mortgage, the lender will make payments to you, which will first go towards paying off an existing mortgage, if there is one, followed by monthly payments or a line of credit. “Reverse mortgages are more complex, but there are no monthly payments due unless you sell the house, move out, or pass away and it provides a steady stream of income for your entire life,” Mallouk said. One common reverse mortgage is insured by the federal government, which is the home-equity conversion mortgage. The HECM is a type of reverse mortgage and is available to qualifying homeowners who own a single-family home, or any of these types of properties. But beware of the potential pitfalls. “These involve higher fees and complexity,” he added. These fees can include mortgage-insurance premiums, an origination fee, and servicing fees. Additionally, all the money you end up owing gains interest — it is not free money. The interest and fees added to the loan balance each month are repaid when the borrower no longer lives in the home, according to the CFPB. You will also still need to pay property taxes and homeowners’ insurance. With $2 million in the bank and with just a few more years to go until you start earning Social Security Income, you need to decide if it’s worth going through all the trouble of getting a new mortgage just to extract value in your home. Very few things in life are free, and especially so when it comes to things like financial products. Instead, what you can do now is to “make sure your portfolio is best positioned to provide you income for as long as possible, keeping in mind Social Security will take some pressure off your income needs in 15 years,” Mallouk said. And if you anticipate that you need the $900,000 further down the line when your funds run a little thinner, you can always tap on the same levers to extract wealth from your home equity. The bonus: The longer you wait to touch it, the more your home’s value will likely increase. For instance, in the last five years in New Jersey, where I live, the median sales price of a single-family home rose 53%, according to local outlet NJ.com, which cited data from the industry group New Jersey Realtors. Don’t put yourself under too much pressure to retire early — you may, for example, wish to ease into this next phase of your life with part-time work. Whatever you decide, enjoy the fruits of your labor when you make your decision. Arthi Swamination
The Retirement Double-Whammy
Numbers don’t lie. Liars use numbers. While that may seem harsh the media’s constant mantra of ‘we only have three percent inflation’ has left many Americans shaking their heads in disbelief. Understandably so. The True Impact of Inflation While the annualized growth of inflation has slowed to 3.4% the cumulative impact of inflation has most goods and services costing 17-25% more than just three years ago. Then there are necessities whose costs have far exceeded inflation such as homeowners and auto insurance, new and used vehicles, and fast food to name a few. Retirement Threatened So how are most retirees coping? They’re simply taking larger monthly distributions from their retirement accounts. A recent Wall Street Journal column notes, “Retirees took more money out of their savings to keep up with rising prices, raising the risk of depleting their nest eggs”. These larger withdrawals shorten the life of a retirement portfolio’s sustainable withdrawals- a phrase made popular among reverse mortgage professionals by Wade Pfau, Jamie Hopkins, and others. A survey from the Boston College’s Center for Retirement Research reveals nearly a quarter of retirees and near-retirees changed their withdrawal rates between 2021 and 2023, boosting distributions by an average of $1,810 in each of those years. “High inflation later in life is often harmful to retirement security,” said Laura Quinby, a senior research economist at Boston College’s Center for Retirement Research and co-author of a study released last month. The center projects inflation will reduce the wealth held by middle-income retirees by 14% from 2021 to 2025. Quinby also noted that while Social Security cost-of-living adjustments have helped weather higher living expenses, other forms of retirement income such as pensions and most annuities do not. How Retirees are Coping with Inflation How are today’s pre-retirees coping with inflation? The survey found that 39% of respondents reported they saved less than before with one-quarter saying they’ve increased their retirement withdrawals. These soon-to-be age-eligible reverse mortgage borrowers will either work longer to offset the havoc wreaked by inflation or risk running out of retirement savings before they die. The Double-Whammy However, the risks of inflation are multiplied when combined with a bear market. The column notes that Bill Bengen, the man who popularized the 4% retirement withdrawal rule of thumb, said 1968 was the worst year to retire. Why? A sustained period of inflation coupled with back-to-back bear markets in 1969 and 1973. In other words, investment losses during a market contraction or recession are especially devastating for retirees and those approaching retirement. While reverse mortgage loan volumes have languished in recent years, the most-feared loan in America could see newfound interest should inflation persist and the stock market fall. If home prices remain relatively stable many could find refuge in their home by utilizing a reverse mortgage. by Shannon Hicks