The best ways to use home equity to fund retirement, according to experts
Over the past few years, home equity levels have increased substantially nationwide. In fact, as of the first quarter of 2024, the average homeowner had seen their equity increase by $28,000 year-over-year, according data from CoreLogic. That uptick in home equity began in 2020 and was driven, in large part, by a mix of low rates, low for-sale home inventory and high demand by buyers. Since then, the average price of a home has increased over 50% — climbing from an average of $317,000 in the second quarter of 2020 to $480,000 in the first quarter of 2024. That has left the average homeowner with about $300,000 in home equity. And, that equity can be borrowed against, typically at a low rate, for a wide range of uses — including debt consolidation and home renovations or repairs. Borrowers also have a few different home equity lending options to choose from, including home equity loans and home equity lines of credit (HELOCs). While home renovations or consolidating debt can be smart ways to use your equity, so can using it to help fund your retirement. For example, you could tap into your equity to help cover retirement expenses, such as unexpected medical bills. But what is the best way to use home equity to fund your retirement — and what are some of the pros and cons of each option? Here’s what to know. The best ways to use home equity to fund retirement Here are some of the best options you have if you want to use your home equity to fund retirement. Opt for a home equity loan or HELOC A home equity loan could provide a lump sum of cash that you can use to cover retirement expenses. Or, you could tap your home’s equity via a HELOC, which works as a line of credit that you can borrow from as necessary during the draw period. However, it’s important to consider the potential drawbacks of each option. For instance, though home equity loans and HELOCs often have lower interest rates than other products, like credit cards and personal loans, it might be tough to repay the loan, including interest, especially if you’re on a fixed income. As a result, it might be best to use these funding options as a short-term solution. “Using a home equity loan or line of credit to fund your retirement is not sustainable over a long period,” says Stephen Kates, CFP and principal financial analyst at Annuity.org. Kates says that while it’s common to use these borrowing options for home renovations and repairs or unexpected expenses, the downside is that they don’t produce a continuous and sustainable income source like some other home equity products. Consider a reverse mortgage to boost income A reverse mortgage may be the best option if your goal is to boost your cash flow. Unlike a home equity loan or HELOC, a reverse mortgage doesn’t require you to repay the loan with monthly payments. Rather, you repay the loan with interest when you sell your home or die. In turn, this option is often best for those who don’t have children or heirs they want to leave their home to, says Gloria Cisneros, a certified financial planner at wealth management firm LourdMurray. Or, it could make sense to use a reverse mortgage if you have other assets set aside for your heirs, according to Cisneros. However, if your need for funds is temporary and you expect additional cash to come in soon, taking out a reverse mortgage to fund retirement might not make sense, Cisneros says. In this scenario, taking out a HELOC or home equity loan could be a better solution. Your home also needs to be paid off or have a low balance to qualify for a reverse mortgage, Cisneros adds. In addition, you generally have to be at least 62 years old, though some lenders have lower minimum age requirements for non-government-insured reverse mortgages. You should also consider whether you can afford the upkeep of your current home if you’re going to use a reverse mortgage loan. After all, one of the requirements of a reverse mortgage is that the homeowners continue to pay property taxes and insurance and keep the property in good condition. Downsize to turn your equity into cash without borrowing Because of the risks of taking out a loan to fund your retirement, Michael Collins, CFA and founder of wealth management firm WinCap Financial, recommends downsizing as an alternative solution. “If your current home is larger than you need in retirement, selling it and downsizing could provide you with extra cash to fund retirement expenses without taking out a loan,” says Collins. This could be the best option to fund retirement, experts say, especially if you can purchase a smaller home in cash. After all, in this scenario, you could avoid paying interest at today’s higher rates, says Donald LaGrange, CFP and wealth advisor at Murphy & Sylvest Wealth Management. Another option for downsizing is selling your home and moving to a retirement community. LaGrange says these communities are often all-inclusive, so it’s possible in some cases to save money by taking advantage of all of the amenities offered. Common amenities include entertainment, housekeeping and private dining and laundry service. Other alternatives for funding retirement Before you take out a loan to fund retirement, be sure to consider all of your options — including those outside of borrowing from your home. For example, you could consider returning to part- or full-time work, says Kates. Getting a job can supplement your income and reduce the need for loans or withdrawals from your savings, Collins says. In addition, you may want to look into government programs like Social Security and Medicare, Collins says, as they can provide certain types of financial support during retirement. The bottom line Taking out a home equity loan or HELOC to fund retirement could be beneficial as a short-term solution. That said, experts warn that it only makes sense if you can comfortably afford to repay the loan, as defaulting has negative consequences like a lender foreclosing on your home.
10 Things You Should Know About Reverse Mortgages
“It’s a personal financial management tool that enables homeowners to convert the home equity into loan proceeds,” says Steve Irwin, president of the National Reverse Mortgage Lenders Association. “Homeowners can access this money without having to sell, move or take on monthly loan payments.” 1. You have multiple ways to tap into your home equity A reverse mortgage allows you to borrow and spend your home equity, that is, the value of your home that you’ve paid off. You could collect a lump sum. You could also set up ongoing monthly income payments, either for a set period or guaranteed to last as long as you’re living in the home. You could set up a line of credit to tap into at your convenience. If you still owe some amount on your mortgage, a reverse mortgage can pay off the remaining debt so you no longer owe monthly payments. If you want to move, you could use a reverse mortgage to pay for your new home. That way, you don’t have to sell first to free up money to buy. 2. Payouts depend on a few factors The amount you receive for a reverse mortgage depends on the value of your home, your total equity and age. The older you are when you apply, the more you receive. That’s because these loans are usually repaid only after the applicant passes away. If you’re married, the payout is based on the age of the youngest spouse. Interest rates also matter. When interest rates are high, like now, you receive less because more of the equity goes towards the borrowing cost. Most reverse mortgages are insured and regulated by the Federal Housing Administration (FHA). The government sets a borrowing limit for these FHA reverse mortgage loans. It’s up to $1,149,825 maximum in 2024, even if your home is worth more. You qualify based only on your age, interest rate and your home’s property value. 3. Fees can be costly When you take out a reverse mortgage, the lender deducts an upfront fee. It also charges interest over the life of your loan. Reverse mortgage interest rates are usually higher than conventional mortgage interest rates, but similar to rates on home equity loans. For example, a married couple owns a $750,000 home in Washington, D.C. The youngest spouse is 75. They could potentially borrow up to $258,699 through a reverse mortgage, according to a calculator from the reverse mortgage association. Alternatively, the couple could receive around $2,000 in ongoing monthly income. The loan would charge $25,551 upfront for fees and costs, and has a 7.5% annual adjusting interest rate. Assuming the couple borrows the full $258,699 upfront, lives for another 15 years, and the interest rate averages 7.5% during this time, the debt would grow to around $765,000. The heirs would need to pay this debt after selling the home, keeping any remaining equity after property appreciation to themselves. A reverse mortgage can be costly versus a home equity loan because of higher upfront fees, but then you have ongoing loan payments. A reverse mortgage is meant for someone who doesn’t have cash flow. 4. There’s a minimum age limit You must be at least 62 to take out an FHA reverse mortgage. If you’re married and only one partner is over 62, you could still take out a reverse mortgage. The lender would classify the younger partner as an eligible non-borrowing spouse and reduce the payment to account for their age. There are private proprietary reverse mortgage loans that aren’t FHA-insured and have more flexibility to set terms. Some of these products accept applicants as young as 55. Private reverse mortgages could also extend credit beyond the $1,149,825 cap for FHA loans. In exchange, these private reverse mortgages may charge higher interest rates. 5. You don’t owe loan payments while living in the home Reverse mortgages do not require ongoing payments while you’re alive and still living in the home. The loan only comes due after you move elsewhere or pass away. At this point, you or your heirs can sell the property to pay off the reverse mortgage, keeping any sale proceeds above the outstanding loan. If your family wants to keep the home, they could refinance the debt to a new primary mortgage. Be sure to coordinate strategies with your beneficiaries so they are ready to make arrangements upon your death, that way, they aren’t surprised and upset by the smaller inheritance. Reverse mortgages are non-recourse loans. They are only secured by your property. If the total reverse mortgage debt exceeds the resale value of your home, the lender can’t go after your other assets or heirs for repayment. 6. Cover taxes, maintenance, and insurance, or else As part of a reverse mortgage contract, you agree to continue paying the ongoing property taxes, homeowner’s insurance, and maintenance. If you don’t, the lender could foreclose and seize the property because you aren’t protecting the asset securing the loan. Several top reverse mortgage lenders faced six-figure fines because they didn’t properly disclose this condition. Their ads made it seem like it was impossible for seniors to lose their homes with a reverse mortgage when they could by breaking the contract terms. The government felt this was deceptive advertising. Keep in mind that you’ve already been paying insurance and property taxes for years as a homeowner and wouldn’t run into problems so long as you keep doing so, says Miser, the financial advisor from Tennessee. “If you don’t pay your property taxes, the government would eventually place a lien and auction the home anyway.” 7. You and your spouse are protected, but other family members are not The government strengthened spousal protections for reverse mortgages in 2014. “Years ago, there were cases of people removing their younger-than-62 spouse from the home title so they could take out a reverse mortgage, “says Enriquez. “When the older partner died, the lender would try to foreclose on the surviving spouse. Today, they can remain for the rest of their lives.”
Swapping Debt May Benefit Older Americans
When swapping debt makes sense in retirement Managing debt is challenging at any stage of life, but it becomes particularly burdensome for older adults who are no longer working. The pressure of making debt payments in retirement can significantly impact their quality of life. Understanding the types of debt older Americans carry can shed light on potential solutions to ease their financial strain. Types of Debt Among Seniors A recent analysis by MarketWatch, using the Federal Reserve’s 2022 data, highlights the debt landscape for Americans aged 65 and older. It shows that nearly 65% of those aged 65-74 have some form of housing or non-housing debt. This figure drops to about 50% for individuals aged 75 and above. Mortgage Debt For those aged 65-74, the average mortgage balance in 2022 was $175,670. Meanwhile, those aged 75 and older carried an average mortgage balance of $138,700. These balances have only seen slight reductions over time. This trend is often due to older homeowners refinancing their homes or opting for cash-out refinances during periods of favorable interest rates. Credit card debt is less prevalent among older Americans. According to MarketWatch, 34% of individuals aged 65-74 maintain a credit card balance. This percentage slightly decreases to 29.8% for those aged 75 and older, indicating a reduced reliance on credit cards in their retirement years. Medical Debt As people age, medical expenses inevitably rise, leading to an increase in unpaid medical bills. The Consumer Financial Protection Bureau (CFPB) reported that in 2020, nearly 4 million Americans aged 65 and older, or 7% of this age group, had outstanding medical bills. Many seniors questioned the accuracy of these bills, with 44% disputing charges and 68% delaying payment in anticipation of insurance covering the costs. Considering Debt Swaps The combined burden of mortgage, auto, medical, and credit card debt can significantly impact the finances of older Americans living on fixed incomes. This raises important questions: How long should they continue to manage these debt payments in retirement? Is it worth the continued financial stress of required monthly payments for possibly another decade or more? How much could their quality of life improve without this debt burden? One potential solution is to consider a reverse mortgage, which allows older homeowners to eliminate required monthly payments by converting their existing debt into a reverse mortgage. For instance, shifting a monthly debt payment of $1,500 into a reverse mortgage could free up $18,000 annually in cash flow. While a reverse mortgage does not eliminate the debt, it restructures it into a loan with flexible repayment terms. Evaluating Debt Structure Ultimately, the focus should not solely be on how much debt older Americans carry but on how their debt is managed and structured. If monthly payments become unmanageable, exploring options like a reverse mortgage could provide significant financial relief. By restructuring debt, older adults may enhance their quality of life, reducing stress and increasing their financial flexibility in retirement. BY Shannon Hicks
Using a Reverse mortgage to renovate your home without having to make a monthly mortgage payment.
Renovating a home to age in place can be the silver lining among the increased health risks and residential hazards that afflict homeowners in their golden years. Most baby boomers — 80% of whom own their homes outright — would prefer aging in their current residences rather than downsizing or moving into an assisted living facility. Now holding $18 trillion in home equity, boomers are disinclined to sell, favoring home renovations to improve safety and mobility. Renovation loans, like FHA’s 203(k) and Fannie Mae’s HomeStyle, are underutilized gems that can fund essential home upgrades. Surprisingly, only a few mortgage pros specialize in these loans. Similarly, reverse mortgages are misunderstood but offer another avenue for seniors to tap into their home equity. With only 200 Certified Reverse Mortgage Professionals in the U.S., many eligible borrowers remain uninformed or misinformed. Since the 60-plus demographic is set to expand to 32% of the adult population within a decade, this represents a largely untapped segment of new borrowers. LOs well-versed in loan products that enable seniors to live comfortably and safely in their cherished homes could be the cream that rises to the top. Todd Woodcock Certified Reverse Mortgage Professional, CRMP
My Struggling 73-Year-Old Dad Owes $45,000 On His Mortgage And $15,000 On A HELOC’ — Should He Sell Or Take Out A Reverse Mortgage?
In the personal finance subreddit, a user sought advice on a common dilemma many seniors face: selling their home or taking out a reverse mortgage. The user explained that their 73-year-old father struggles to pay off a $45,000 mortgage and a $15,000 HELOC, relying mainly on Social Security and a small pension. They mentioned the father is considering selling his home in Florida, where the housing market is starting to slow, or taking out a reverse mortgage. Don’t Miss: The Reddit discussion provided a range of insights. Some users suggested that selling might be more beneficial financially if the father is willing to rent for the rest of his life. This could potentially eliminate debt and provide a fresh start without the responsibilities of homeownership. One user wrote, “Often, selling is financially better if he’s willing to rent for the rest of his life. But it depends on the numbers.” Some highlighted the risks and emotional stress associated with moving at an older age, including losing a support network and the physical and emotional toll of relocating: “OP’s dad is 73, and moving carries risks compared to a stable living situation. What if he hates the new place or loses his support network?” Several users supported the idea of a reverse mortgage as it allows the father to stay in his home while converting home equity into cash to pay off debts and cover living expenses. A reverse mortgage could improve cash flow and help manage unforeseen expenses. One user explained, “A reverse mortgage could help if he can maintain the house and pay insurance. It’s a government program designed to protect seniors.” Trending: Are you rich? Here’s what Americans think you need to be considered wealthy. Experts generally advise that a reverse mortgage can be a good option for seniors who plan to remain in their home long-term and do not prioritize leaving the property to heirs. Reverse mortgages allow homeowners to convert home equity into cash without making monthly payments, benefiting those on a fixed income. However, they come with high upfront costs and the requirement to keep up with property taxes and insurance. Failure to meet these obligations can lead to foreclosure. Another option suggested was taking in a renter to generate additional income without selling the home. One commenter wrote, “He could consider taking in a renter for additional revenue.” Others proposed solutions involving family, such as a family member buying the house and allowing the father to live there, which could provide stability and keep the home within the family. One user proposed, “Can you buy his house? Hire an agent to sort out the sale, you buy it for around $75K, and let him live there. It’s an investment for you and provides him stability.” Ultimately, the decision to sell or take out a reverse mortgage should be made after careful consideration of all options. Consulting with an expert can provide tailored advice to help make the best decision for the father’s specific situation. Jeannine Mancini
More Americans are splitting after 50. Financial planning tips for a ‘gray divorce’
The divorce rate has doubled since 1990 for Americans over 55. For couples over 65, the rate has tripled. And in financial terms, few “gray divorcees” are better off. Gray divorce has surged in recent decades, federal data shows, even as the divorce rate for younger Americans has declined. “One in 10 people getting divorced today is 65 or older. That is remarkable,” said Susan Brown, distinguished professor of sociology at Bowling Green State University in Ohio. “A growing share of aging adults will be aging alone.” What is a gray divorce “Gray divorce” refers to rising divorce rates among older adults. Several demographic factors shaped the gray divorce phenomenon, researchers say: The American population is aging. People are staying healthy longer. Couples are marrying later. And fewer marriages last. Just 7.7% of all current marriages have reached the 50-year mark, Bowling Green researchers found in a recent report. The share of older couples who stay married for a half century is declining. Gray divorce regrets In dollar terms, divorce is costly to anyone. Yet, for older Americans, the costs are steeper. “I haven’t seen a scenario in which either partner is better off financially,” said Elizabeth Windisch, a certified financial planner in Denver. A man can expect his standard of living to decline by 21% after a gray divorce, according to research by Brown and her colleagues. A woman’s standard of living will plunge by 45%. Both partners see their wealth decline by half. Women seem more likely to initiate a gray divorce, Brown said. And women tend to fare worse after the parting, at least in financial terms. Women are more likely to take custody of the children, along with those costs. Women who divorce after 50 tend to have less work experience than their partners, which means less potential for future earnings. Here are a few of the biggest financial challenges facing older Americans who divorce, and tips for meeting them. Get the Daily Briefing newsletter in your inbox. The day’s top stories, from sports to movies to politics to world events. Delivery: DailyYour Email Rebuilding your shattered retirement plan Problem: Gray divorce can gut your retirement account, leaving you little or no time to rebuild. Solution: Make a new plan. If you haven’t retired, save aggressively to replenish your savings. In a gray divorce, a couple’s collective retirement savings may be redistributed into equitable shares, one for each partner. That might not sound so bad, until you consider all the other expenses that come with divorce: Finding new homes. Shopping for new health insurance. Paying legal bills. “It’s double the expense for pretty much everything,” said Michelle Crumm, a certified financial planner in Ann Arbor, Michigan. Crumm represented a client who was divorced at 50. She was a high-level executive. Her husband was a stay-at-home dad. “She had to give half of her 401(k) to him. She has to pay him alimony,” Crumm said. “It looks on paper like this woman makes a ton of money, but in reality, there’s not a lot left.” Crumm told her client her top priority should be “getting her retirement plan back on track.” That meant “maxing out everything she can” for retirement savings, diverting a larger share of her income into that diminished 401(k). “She realizes she has a lot of work to do to catch up,” Crumm said. “She leases a car every year. So, we’ve had the conversation, ‘Should you buy a car?’ Maybe I go on vacation in the United States instead of a European vacation.” The client’s oldest daughter is about to start college. Because of the mother’s high salary, the daughter probably will pay full price wherever she enrolls. The client wants to send her daughter to a private institution. Crumm counseled her instead to go public: the flagship University of Michigan charges about $35,500 in in-state tuition, fees and living expenses, less than half the full cost of an elite private college. Crumm put it bluntly: If the daughter spends four years at a private college, the mother may have to delay her own retirement by that many years. “She originally said 62,” Crumm said. “I said, ‘We’re probably looking at 65 or 67.’” Now, mother and daughter face a hard choice. Returning to work after a long hiatus − or not Problem: It’s harder to earn money after a divorce if you haven’t worked in years. Solution: Figure out if you can live comfortably without returning to work, even if it means a tighter budget. A gray divorce can be especially daunting for an aging spouse who, decades earlier, gave up a career to raise a family. Patti Black, a certified financial planner in Birmingham, Alabama, worked with a client in her 50s whose husband of three decades asked for a divorce. The woman was living in her dream home, now an empty nest, counting the years to a prosperous retirement. “She had not worked in 25 years, I think,” Black said. The woman soon realized she would never find a job with a salary that even approached what her husband earned. “We worked very hard to come up with a plan so that she didn’t have to go back to work,” Black said. That meant giving up the dream home, buying a smaller one and living on a reduced budget. Now, she’s waiting for the dream home to sell. Divvying up the family home Problem: You have to decide what to do with the marital home. Solution: Consider all the costs of owning and maintaining that home before you decide who gets it − if anyone. In a gray divorce, any marital home can feel like an asset − or a burden. Let’s say the house has $250,000 in equity and 10 years remaining on the mortgage. If the settlement delivers the dwelling to one spouse, then that spouse probably also inherits the mortgage payments. And the property taxes. And the insurance. And the maintenance. If the spouse elects to refinance the mortgage, that could mean giving up a loan with a historically low interest rate for a new
I’m a Real Estate Agent: Here Are the 8 Best Ways To Fund Your Renovations During Retirement
You’ve decided you want to stay long-term in your current home, and perhaps even make it your “forever home.” But to make aging in place more comfortable, you want to renovate. How do you pay for them as a retiree? The good news is that you have plenty of options, which is also the bad news. Consider the pros and cons of each option to fund home renovations in retirement. 1. Grants & Specialty Loans for Seniors The best way to pay for home renovations is, well, not to pay at all. Let someone else pay for it. Rhett Stubbendeck, founder of financial planning firm Leverage, points out that you may have more options than you realize. “Check out government programs and grants. There are many available, especially for accessibility upgrades. At Leverage, we’ve helped clients secure these funds to reduce out-of-pocket costs.” Don’t stop at federal programs, either. Many of the most generous programs operate at the state or local level. In particular, many of these programs help cover the cost of age-related accessibility or energy efficiency upgrades. Get creative in combining these together. If you can’t find a grant, you may find a subsidized loan program to help you score a low-interest, low-fee loan to cover the home improvement costs. 2. Cash Could you pull together enough cash to cover most of the renovation costs? Avoid taking on fresh debts in retirement if you can. Look under every proverbial cash cushion to see if you can cobble together the funds. “Paying in cash is the best choice if it doesn’t interfere with other financial goals or exceed your budget,” advises Michael Kotler, a Realtor in Hoboken New Jersey, If you can get most of the way there with cash, you may be able to close the gap with credit cards. 3. Credit Cards It sounds unconventional, and it is. But paying for home upgrades by credit card can still potentially save you money over HELOCs, home equity loans, and refinancing (more on those shortly). “When you borrow a home loan or home equity line of credit, it’s secured by a lien,” explains Luke Babich of Clever Real Estate“ That requires a title search and a formal loan settlement, which often add up to over a thousand dollars in fees. And that says nothing of lender fees, which rack up quickly. “Sure, you’ll pay higher interest rates on credit card debt than a HELOC. But if you can pay off the card balances relatively quickly, the higher interest could still cost you far less than the thousands in settlement costs.” Some credit cards offer introductory 0% APR periods as well, perhaps giving you up to 18 months to pay off the balance interest-free. Bear in mind that you can pay for materials yourself, directly on your credit card, and many contractors accept credit card payments if you pay a convenience fee. 4. Personal Loans Another unconventional financing option includes personal loans. Like credit cards, they charge higher interest than secured loans but let you avoid expensive settlement fees. “Personal loans are also an option, especially for smaller projects,” points out Stubbendeck. “They don’t use your home as collateral, making them simpler but typically with higher interest rates.” 5. HELOCs A home equity line of credit or HELOC offers a flexible funding source. You can draw on it as needed, and pay it back at your own pace (at least until it rolls over to a fixed repayment term). Real estate agent Michael Kotler explains further. “If you’re not sure what the total renovations costs will be, a HELOC, or home equity line of credit, may be the best choice, as it lets you withdraw funds as needed, and you can make minimum monthly payments on the amount you borrow.” 6. Home Equity Loans Kotler continues: “Conversely, a home equity loan may be best if you know the exact cost of your project, as it provides a lump sum upfront.” Home equity loans usually take the form of second mortgages if you already have a first mortgage against the property. Just beware that you do incur settlement fees, as outlined above. 7. Cash-Out Refinancing “A third option using your home’s equity is a cash-out refinance, especially if the mortgage interest rate is lower than your current mortgage,” says Kotler. “If you need a large loan and plan to stay in your home long term this may be for you. You take on a larger loan, pay off the existing mortgage, and get a new one which gives you cash to pay for the renovations.” Expect higher lender fees however. Lender points equal one percent of the loan amount — a much higher figure when you refinance your entire mortgage. Also beware that you extend your debt horizon many years into the future. 8. Reverse Mortgages If you plan to stay in the home forever, and don’t want the burden of a mortgage payment, you can borrow money with a reverse mortgage. “For retirees over 62, a reverse mortgage can be a smart choice,” notes Stubbendeck. “It allows you to access your home equity without monthly repayments. This is perfect if you plan to stay in your home for a long time.” Reverse mortgages come with their quirks, so make sure you understand the terms before signing on the dotted line. You could receive a lump sum upfront, ongoing monthly payments from the lender or a combination of the two. Get clear on when monthly payments will end and what you can otherwise expect — and what the lender expects from you. Final Thoughts Debt is a tool, and like any tool, you can use it to your advantage or cut yourself with it. When in doubt, get help from a financial advisor. The last thing you want to do is saddle yourself with an expensive debt burden in retirement, no matter how nice that new kitchen might look. Written by G. Brian Davis
Beyond the Basics: 10 Powerful Benefits of Reverse Mortgages You Didn’t Know About
Unlocking more than just cash and explore the unexpected advantages of reverse mortgages for a secure retirement What would retirement be like if you didn’t have to make a monthly loan payment? Imagine the financial freedom you could achieve if you no longer had to make a monthly mortgage payment. Reverse mortgages can be strategically utilized to manage and reduce debt obligations, enabling retirees to maintain financial stability and enhance their lifestyle. Understanding the Growing Debt Burden According to the Consumer Financial Protection Bureau, an increasing number of retirees carry mortgage debt into their retirement years. Some studies estimate that 50-68% of new retirees will have some form of loan payment, including home equity loans and lines of credit. For the mass-affluent baby boomer demographic, this percentage might be even higher. Consider the last social gathering you attended where you spoke with homeowners over the age of 55. How many of them had a mortgage, home equity loan or line of credit against their property? It’s likely that a significant portion of them did. In fact, it wouldn’t be surprising if the number was somewhere between 75-99%. This highlights the prevalent issue of mortgage debt among older homeowners, making the case for exploring debt management strategies such as reverse mortgages. For retirees aged 75 and older, housing expenses, including mortgages, property taxes, insurance, utilities and home maintenance, account for a substantial 43% of their monthly spending. With low savings rates, longer life expectancies and global uncertainty, eliminating a monthly mortgage payment and creating additional cash flow could be a considerable relief. Reverse Mortgages: A Brief Overview A reverse mortgage is a loan available to homeowners aged 62 or older, allowing them to convert a portion of their home’s value into tax-free dollars without giving up home ownership or title and without making monthly loan payments. The loan amount is based on the age of the youngest borrower, the home’s value and current interest rates. This is important: a reverse mortgage must be the first mortgage on the property, meaning any existing loans must be paid off with the reverse mortgage proceeds before the homeowner can access the remaining funds. Today, let’s consider the impact of eliminating a mandatory monthly mortgage payment. Case Study: Pierce and Linda Meet Pierce and Linda, a 65-year-old couple planning to retire at the end of the year. Here are their financial details: They are concerned about running out of savings or having to cut back on their lifestyle to make their savings last. While researching their retirement success rate, Pierce and Linda discovered that many financial advisors and online calculators suggest a safe initial withdrawal rate of around 4%, which for them would be $26,000 per year instead of $45,000. This realization was disappointing, but it prompted them to explore alternative options. Through further research, Pierce and Linda decided to consider a reverse mortgage to see if it could work for them. Although they are fully comfortable making their monthly payment, they want to explore all possibilities, especially if it could increase the amount of spending they could enjoy without jeopardizing their nest egg. During their research, they encountered two thought-provoking questions: These questions led them to consider a reverse mortgage as a viable option to enhance their retirement plan. The Reverse Mortgage Solution Based on their ages, home value and current interest rates, Pierce and Linda qualify for a reverse mortgage of $216,300. After paying off their $200,000 mortgage, they have a remaining line of credit of $16,300. Let’s explore 10 retirement-enhancing benefits of eliminating their mandatory monthly loan payment. 1. Extending Retirement Savings Years ago, my friend and mentor Ed Slott, CPA, asked me: “How much money does a client save when they use a reverse mortgage to eliminate their existing payments?” Initially, I thought the answer was obvious: in the case of Pierce and Linda, they would save $1,750 a month. “Not necessarily,” he replied. What he explained next was eye-opening. Eliminating a $1,750 monthly mortgage payment translates to significant savings for retirees like Pierce and Linda. With $650,000 in tax-deferred accounts like IRAs or 401(k)s, they would need to withdraw approximately $2,250 monthly (considering taxes) to net the $1,750 needed to cover their mortgage payment. By using a reverse mortgage to eliminate this payment, they retain around $27,000 annually in their savings ($2,250 x 12). This substantial retention can significantly extend the longevity of their retirement funds, ensuring greater financial stability throughout their retirement years. By leveraging a reverse mortgage to eliminate their monthly mortgage payments, Pierce and Linda can preserve their savings, potentially extending their retirement funds significantly, providing them with greater financial security and peace of mind. 2. Reducing Income Taxes By retaining nearly $27,000 in pre-tax dollars, Pierce and Linda not only lower their income taxes but also reduce their provisional income, which could prevent their Social Security benefits from being taxed. 3. Bridging the Budget Gap Initially, Pierce and Linda desired an annual withdrawal of $45,000 but considered a more conservative $26,000. The $19,000 difference can be bridged by the reverse mortgage. By eliminating their mortgage payment, they free up $27,000 per year in pretax dollars. Meaning they only need to withdraw around $18,000 from their retirement accounts in the first year. Looks like they can use the additional dollars per month to enhance their lifestyle, travel and enjoy the go-go years of retirement. In other words, they can have their cake and eat it too! 4. Supporting Grandchildren’s Education With the extra $1,750 per month saved from the reverse mortgage, Pierce and Linda could contribute to their grandchildren’s education. This money could provide a monthly tuition stipend, a gift or even a low-interest loan, offering significant financial support and creating a lasting legacy. The rising costs of higher education can be a burden on younger generations, and this contribution can make a meaningful impact on their grandchildren’s lives and futures. 5. Funding Life Insurance Policies The monthly savings can be directed toward purchasing cash value life insurance policies
Unlocking financial freedom: How home equity release is transforming retirement planning in America
Over the last few years, the financial landscape has undergone a major shift, with the cost of living crisis casting a shadow on the traditional notions of financial security in retirement. From skyrocketing house prices to rising costs of healthcare and everyday essentials, the gap between what seniors want and what is realistic when it comes to aging in place is growing significantly. Research has found that if given the choice, 85 per cent of seniors would prefer to age in place. Meaning it’s time to acknowledge the new reality they are facing and equip them with the tools they need to make informed decisions about their financial future from planning pre- and post-retirement. The reverse mortgage One often misunderstood solution is the reverse mortgage. A reverse mortgage helps homeowners over the age of 55 age in place by providing them access to equity in their home to support general or unexpected expenses, give a living inheritance to their loved ones, or fund home renovations. Empowering aging in place A reverse mortgage can be a lifeline for homeowners 55 and above, offering them the means to age in place gracefully. Contrary to traditional mortgages, it doesn’t burden them with monthly payments. Instead, it furnishes tax-free funds, with interest accruing over time and the loan becoming due upon the homeowner’s passing or decision to sell. Crucially, beneficiaries still retain access to vital benefits such as Social Security. Meeting diverse needs The beauty of a reverse mortgage lies in its versatility. For homeowners burdened with monthly mortgage payments, it liberates them from this financial strain, putting more money back in their pockets. Others may utilize the funds for renovations, supporting their children or addressing unexpected expenses. It’s a flexible tool tailored to meet the unique needs of each individual client. Addressing retirement concerns In today’s economic landscape, retirement planning is fraught with concerns about rising costs and dwindling savings. A study done earlier this year underscores this apprehension, with 67 per cent of homeowners aged 55 and above expressing worries about maintaining their lifestyle throughout retirement. Real estate is often their most valuable asset, presenting a viable opportunity. With property prices where they are, tapping into home equity sustainably and responsibly has become a major source of financial relief for those who are “house rich” but still struggling to live the comfortable retirement they desire. Common misconceptions Despite the benefits, reverse mortgages are often surrounded by negative myths and misconceptions. Let’s set the record straight. Myth: You no longer own your home with a reverse mortgage. Reality: With a reverse mortgage, homeowners retain 100 per cent ownership of their property. Myth: You may owe more than what your home is worth. Reality: Legitimate reverse mortgage providers offer a no-negative-equity guarantee, which ensures that homeowners or their heirs will never owe more than the fair market value of the home. Myth: Your children will lose the family home. Reality: The estate retains ownership of the home, offering heirs the opportunity to refinance or settle the mortgage through alternative means. Myth: There will be no equity in the home to give to your heirs. Reality: Despite the loan balance, homeowners or their heirs often retain considerable equity, especially in a rising home price environment.
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