Why equity-tapping challenges may make reverse mortgages ‘inevitable’
Tapping into home equity, particularly for people in or near retirement, can be challenging — especially for those who may have a pressing need. Traditional equity-tapping methods — such as selling the home or taking out a home equity loan — could present lifestyle challenges, which is where alternative options like reverse mortgages can come into play. But these products also come with their own challenges, according to a column published recently by The New York Times. Older homeowners may contemplate the traditional methods, but depending on the person, they may be out of the question, according to financial columnist Ron Lieber. “Your home may be just the way you like it, because you built it that way or spent decades fixing it up,” the column explained. “If you’re attached to local doctors or a house of worship, it is difficult to cut ties and move away. Clearing out years of belongings is a total pain. And an appropriate and affordable new place — no steps, minimal maintenance — may simply not exist wherever you want to be.” Interest rates also further complicate matters if the homeowner has a more beneficial mortgage rate than is available today. And many seniors who hope to leave their home to an heir may find other challenges tied to the idea of selling. “That brings us to reverse mortgages,” Lieber wrote. “With this product, eligible people 62 and older can extract equity in a variety of ways, say through a lump sum. Interest accrues in the background, and the balance of the reverse mortgage goes up instead of down, the way a normal mortgage would. You generally pay off the mortgage when the home is no longer your principal residence.” But most people “reject reverse mortgages,” according to the column. “Lenders have rarely underwritten more than 100,000 federally insured ones in any fiscal year, and that hasn’t happened since 2009,” Lieber wrote. “Many older people remember scandals involving the products, when borrowers felt misled and surviving spouses or heirs could not keep the homes. New federal protections helped clean things up.” Considering the demographic realities, however, it may not be possible to avoid products like them. “Reverse mortgages or something like them seem inevitable in a nation where individuals are entirely responsible for their own retirement savings,” the column explained. “One good test for their utility is this: Do any financial advisers who pledge to act only in the best interest of their clients help members of their own family borrow in this way?” One financial planner — Jeremy Eppley of Owings Mills, Maryland — shared the story about why he recommended the product to a client. His aunt owns her home free and clear, but inflation has encroached on her fixed income in retirement. A reverse mortgage helped improve the quality of her life, Eppley told the Times. “I’d never heard of her going on vacation,” he said. “She could live a little.” Other companies are engineering alternatives for tapping home equity, like shared equity investment products or sale leasebacks. But the core issue of the way that retirement financing is structured in the U.S. may necessitate a broader adoption of home equity-tapping tools, the column said. “With home equity, we may have tipped too far into seeing homes as totems of a financial life well and conservatively lived,” Lieber wrote. “Homes are trophies, sure. But their equity is also a tool. Absent any radically improved government safety net, people without much savings are going to need more ways to extract it.” Chris Clow
When is a reverse mortgage the best home equity option? Experts weigh in
Inflation continues to strain the economy and American household budgets with higher prices at the gas pump, grocery store and other everyday purchases. As a result, many are taking on extra jobs and side hustles to make ends meet. Along the same lines, many Americans are exploring alternative sources of income to cushion their finances. Homeowners, for example, may be able tap into their existing home equity to pay bills, fund a home renovation or cover a large unexpected expense. One home equity option many older homeowners are considering is a reverse mortgage, which allows them to convert some of their home’s equity into cash to pay down high-interest debt or improve their financial security during retirement. As you might expect, a reverse mortgage differs from other home equity products like home equity loans and lines of credit (HELOCs). Below, we’ll break down when a reverse mortgage can be a beneficial home equity option. When is a reverse mortgage the best home equity option? Here’s when this may be the best home equity choice for you, according to the experts we spoke to. When you’re a senior and eligible A reverse mortgage can be an excellent option for seniors to unlock their home equity and supplement their retirement income. As Sarah Alvarez, vice president of Mortgage Banking at William Raveis Mortgage, notes, “the number one reason borrowers get a reverse mortgage is because there is no monthly mortgage payment until the borrower no longer occupies the home as their principal residence.” Among other reverse mortgage eligibility requirements, you must be at least 62 years old, own a single-family home or other eligible property and live in the home as your primary residence. You also must have at least 50% equity in your home and must be able to afford ongoing property taxes, maintenance and other house-related expenses. But if you qualify, a reverse mortgage may be more beneficial than other home equity products, depending on your situation. If you are already retired and no longer have a regular income, a reverse mortgage would be best, as there are no income requirements or monthly payments necessary, However, the closing costs and fees may be higher than those of an HELOC. When you don’t plan to leave your home to heirs A reverse mortgage might be worth it if you don’t have beneficiaries who stand to inherit your home. That’s because reverse mortgages are paid off once you sell the home, which often happens after you die. Keep in mind, your heirs aren’t responsible for the debt. However, if they want to sell the home, they must pay off the reverse mortgage first and before receiving any remaining proceeds. “If you don’t plan to leave your house to heirs, or if you don’t have any heirs at all, a reverse mortgage can be a practical solution if you’re 62 or older and need cash,” notes Eric Croak, CFP and president at Croak Capital. “It allows you to utilize the equity in your home, and there’s no reason not to enjoy the value you’ve built up in your property.” When you want to live in your house long term A recent Redfin survey revealed that 78% of older American homeowners are committed to staying in current homes. If you plan on staying put in your home as you grow older, a reverse mortgage can help you tap into your home equity for supplemental cash in retirement. On the other hand, taking out a reverse mortgage makes little sense if you plan to move in the near future. Remember, you must repay a reverse mortgage once you move out of your home so a near-term move means you’d have little time to enjoy the benefits of the reverse mortgage before you have to pay it back. When you get a reverse mortgage, you can typically qualify to receive around 40% to 60% of your home’s appreciated value, which may not last indefinitely. “If you take out a reverse mortgage hoping to have income from your home equity for the rest of your life, consider that you don’t know how long you will live,” Croak notes. “If you outlive your mortgage, the upside is that you don’t have to leave your home, even though you stop receiving payments from the lender. The downside is you’ll still have all the costs of owning a home, plus your other living expenses and bills. This could mean you might have to sell the home and get whatever money you can from it.” The bottom line While reverse mortgages can be a wise option to increase your financial security in retirement, they’re not without drawbacks. Consider your financial situation and long-term goals carefully before proceeding. For example, you might not opt for a reverse mortgage if you’d struggle keeping up property taxes, homeowners association and other homeownership costs. If you can’t, If you don’t, or if you move out of the home for 12 months or longer, you may have to repay the reverse mortgage. “When it is determined that the borrower no longer occupies the home as their principal residence, what is borrowed plus interest is due to the lender,” says Alvarez. “This is a complex product, and it is important to make sure you fully understand the implications, but it can be a great solution to help someone remain in their home.” By Tim Maxwell
A reverse mortgage may be the solution for younger cash-strapped would-be homebuyers.
Home affordability has reached its worst level since 1984. Today the average mortgage payment requires 38% of the median household income showing housing affordability has deteriorated to its lowest level since the mid-1980s according to Black Knight. With home prices generally still at their post-pandemic highs and the average 30-year fixed-rate mortgage hovering around 7.24% would-be homebuyers are pushed to the sidelines. To afford a median-priced home of $400,000, homebuyers would need an annual household income of $110,871, according to Bankrate’s Housing and Income Study. Bankrate’s February 2024 Down Payment Survey found more than half of would-be homeowners (54 percent) said their incomes were not high enough to afford the required down payment or closing costs. But it’s not just recent college graduates who find themselves unable to afford a home. Adult children in their 40s and 50s face a similar predicament with inflation and home prices outpacing their earnings. Yet, help could be on the way for adult children whose parents can step up to provide the assistance needed to purchase a home and begin building future equity. Parents could cosign a mortgage thus backstopping the loan and being responsible for any missed payments. However, such a generous gesture comes with the risk of them incurring the burden of another mortgage payment or risk damage to their credit should their child default. Parents with adequate financial resources and liquidity may gift their children the money required for a down payment. However, under current tax guidelines gifts totaling over $18,000 a year must be reported as income. Would-be homebuyers may also find assistance if their parents provide them with a family loan. This still requires that their parents hand over a tidy sum of cash that may negatively impact their retirement savings and potential earnings. However, some younger homebuyers may need a reverse mortgage to buy a home in today’s market–their parent’s reverse mortgage. Older homeowners who wish to assist their children in purchasing a home and who don’t want to tap into their retirement savings or draw from their cash reserves could opt instead to get a reverse mortgage. The parents could use a portion of their reverse mortgage proceeds to provide the needed down payment or pay a portion of their child’s monthly mortgage payment. This would allow them to leave invested and liquid assets untouched while generating the cash needed to help their child. The trade-off is that mom and dad are offering up an increasing portion of their home equity to help. However, if they had planned to leave the home to their children such a strategy could be seen as an early inheritance. A 2023 Charles Schwab survey of more than 700 American investors between the ages of 27 and 95 found more than three-quarters of parents plan to leave their homes to their children when they die. And with this being one of the most common objections to getting a reverse mortgage, an early inheritance strategy may overcome this common misgiving. With home prices and interest rates at record highs, adult children of all ages may need their parent’s assistance to buy a home. A reverse mortgage, when suitable, could fit the bill. By Shannon Hicks
DeSantis stamps changes to reverse mortgage tax requirements in Florida
Florida Gov. Ron DeSantis (R) signed a bill into law this week that changes certain requirements for the state’s reverse mortgage borrowers, a move that the National Reverse Mortgage Lenders Association (NRMLA) says could save money on closing costs. The new law, House Bill (HB) 7073, changes the way the state’s “documentary stamp tax” can be applied to reverse mortgages, among other provisions related to taxation. The documentary stamp tax “is an excise tax imposed on certain documents executed, delivered, or recorded in Florida” according to the state’s Department of Revenue. Common examples of instances subject to the tax include “documents that transfer an interest in Florida real property, such as deeds” as well as “mortgages and written obligations to pay money, such as promissory notes,” the department said. Under Florida law prior to the bill’s passage, “if a mortgage is recorded in the state, it is subject to the documentary stamp tax on the full amount of the obligation secured by the mortgage, regardless of whether the indebtedness is contingent,” according to an analysis by the Florida House of Representatives’ ways and means committee. “Currently, the documentary stamp tax is applied to the entire mortgage obligation amount rather than being applied to the principal limit amount,” or the maximum amount of proceeds that a reverse mortgage borrower can receive. This will now be changed, according to provisions of the law as analyzed by the committee. “For reverse mortgages, the bill requires the documentary stamp tax to be applied to the principal limit amount and not the entire mortgage obligation amount,” the committee said. “The bill defines ‘principal limit,’ and requires the documentary stamp tax be calculated on the principal limit at the time of closing. The bill clarifies that the changes to the act apply retroactively, but do not create a right to a refund or credit of any tax paid before the effective date of the act.” As argued by NRMLA in a letter submitted to the state in March, the current law effectively makes reverse mortgage borrowers subject to pay documentary stamp taxes on amounts higher than what they can actually receive in a reverse mortgage’s principal limit. In a statement, “DeSantis described the new law as a counterbalance to “reckless federal spending“ approved by Congress and the White House. The law will take effect across the state on July 1.
3 Ways Boomers Can Leverage a Home for Retirement Income
Senior couple relaxing at home in the kitchen together© JGalione / Getty Images More boomers are retiring than ever before. According to CNBC, the baby boomer generation (those aged 46-64) will hit “peak 65” this year, with more than 11,200 Americans turning 65 every day (or over 4.1 million every year) from 2024 through 2027. Your golden years, while exciting, can also bring financial challenges without proper financial planning. Luckily, there are several ways to leverage the equity and value of your home to add additional cash flow in retirement. Here are three ways to leverage your home for retirement income, according to Experian: Do A Cash-Out Refinance A cash-out mortgage refinance involves taking out another home loan to absorb the remainder of your existing mortgage loan balance. You’ll go through a similar process as you did the first time you got a mortgage and your income, assets, debt and credit score will all factor into the approval process. The idea behind a cash-out mortgage refinance is that the new loan is significantly larger than your old one. It’s worth noting that lenders will typically allow you to borrow up to 80% of your home’s value. The cash balance from the loan that remains after your old mortgage balance is satisfied can be used for extra retirement income. Here are some potential drawbacks: Take Advantage Of A Reverse Mortgage A reverse mortgage allows retirees to trade the equity in their home for cash. Your home is used as collateral, however, you don’t have to move or sell your home. A reverse mortgage can provide upfront cash with fixed monthly payments. While similar to a line of credit or a home equity loan, the one major difference is that a reverse mortgage does not have to be repaid. Instead, the lender gets repaid from the outstanding equity on the home. This happens when any of the following occurs: Reverse mortgages are typically available to those age 62 or older and have significant equity in their homes. The most common type of reverse mortgage is called a home equity conversion mortgage, which is insured by the Federal Housing Administration (FHA). As of 2023, these are capped at $1,089,300. It’s worth noting that you’ll still need to cover closing costs, home appraisal costs, and application fees. Consider Downsizing If all your adult children have moved out of the house or you simply no longer need as much space, consider downsizing your home. By selling your home and purchasing something less expensive, you’ll be left with a nice lump sum of cash to put towards retirement. Here are a few important factors to consider: Story by Adam Palasciano
US Debt is forcing Americans to make difficult choices
The real-life impacts of our national debt and inflation will force more Americans to make some difficult choices Many reverse mortgage professionals have seen homeowners who’ve made numerous poor financial decisions: racking up high balances on their credit cards, spending more than they earn, and not setting aside money for the future. But there’s another spendthrift whose unchecked spending and accumulation of debt impacts us all. His name is Uncle Sam. In his column, A Reverse Mortgage on the Country David Thomas simplifies the scope of the federal government’s debt making it more tangible. To simplify matters he deducted eight digits from the nation’s expenditures and income creating a fictitious family unit. Here are the key numbers from the U.S. government’s 2023 Federal budget: Uncle Sam’s Family Budget: Dropping eight digits we can see that Uncle Sam’s family brings in approximately $44,000 each year, has $61,300 in annual expenses, has incurred $16,900 in new debt, and now owes a total of $331,700 to date. However, unlike your neighbor Uncle Sam (AKA the U.S. government) can do one thing to manage his increasing debt- create inflation. How inflation is used to reduce the national debt Because our national debt is based on the U.S. dollar reducing the value of the dollar reduces the value of the debt. This transfers the burden of our national debt from the creditor (the Federal government) to the borrower (every current and future U.S. resident). Consequently, every American today is shouldering part of the national debt as inflation erodes their purchasing power and reduces their standard of living. “Essentially, what we have is a reverse mortgage on the country, a practice where we draw upon future resources to meet present demands”, writes David Thomas. Older homeowners suffering under the burden of inflation may consider a reverse mortgage drawing from the accumulated value of their homes to offset the hidden tax of inflation that was forced upon them. In conclusion, our national debt is more than just a number- it’s a game-changer that impacts everyone, especially retried Americans living on a relatively fixed income. With the U.S. debt continuing to climb some hard choices will have to be made as inflation continues to rob us of our purchasing power. By Shannon Hicks
Modern retirement problems require modern solutions
Society is still clinging to a retirement model that no longer exists The renowned comedian Chapelle coined the phrase “Modern problems require modern solutions”, in the first episode of the season of his self-named show. This classic comedic line brings to mind the challenges older Americans face today. Modern problems such as only 21% of retirees having a company pension and a quarter of Americans have no retirement savings at all. Due to a lack of retirement savings, high interest rates, and stubborn inflation, the wheels have fallen off the proverbial retirement wagon. But all hope isn’t lost for those fortunate enough to own their home in which they may have substantial equity. A CBS’s MoneyWatch column entitled, “Here’s when a reverse mortgage makes sense, experts say” points to four situations when getting a reverse mortgage may be the right choice. The first is when retirees find themselves lacking the funds to live comfortably in their non-working years. Even those who diligently saved and invested over decades under the guidance of a financial planner could end up coming up short thanks to inflation. Generally, financial professionals plan for an annual inflation rate of 2.5% However, inflation above this threshold places increasing stress on a retiree’s ability to maintain sustainable withdrawals throughout retirement. Many who believed their savings would be sufficient will keep their homes hoping to pass them on to their children. However, sustained inflation or an unforeseen financial shock can wreak havoc on the best-laid plans. Future stock market losses can further constrain future cash flow when coupled with the increased cost of living. The second example when a reverse mortgage may make sense is when a retiree is considering taking out a loan to offset upcoming or current expenses. With both HELOCs and personal loans requiring monthly payments a reverse mortgage can provide access to cash without the burden of payments. Reverse mortgages stand alone as the only loan that doesn’t require the borrower to make principal and interest payments each month. The third factor that could make a reverse mortgage ideal is when a homeowner has substantial equity. According to NRMLA’s RiskSpan Reverse Mortgage Market Index, homeowners 62 and older had $12.84 trillion in equity. However, many homeowners overlook that home equity is neither real nor tangible until it’s separated from the home either by a sale or taking a loan. Just because it’s there today doesn’t mean it will be there tomorrow. Consumers with few assets to leave to their heirs may want to avoid a reverse mortgage. Their heirs may be left with little to no equity and very few options to keep the property, while this may be true, most older homeowners don’t want to be a financial burden on their children. And if their children are unable or unwilling to assist what’s the homeowner’s Plan B? The fourth situation when a reverse mortgage may be suitable is when a retiree wants to postpone tapping into their retirement savings or delay Social Security benefits. While such strategies may reduce taxes and boost future Social Security payments retirees should seek the advice of a qualified financial professional who can help them weigh the costs, benefits, and risks of postponing Social Security. In conclusion, older Americans are facing modern problems. These problems require modern solutions not rooted in the retirement trends of yesteryear but based on the brave new world older Americans face today. Yes, modern problems require modern solutions, and a reverse mortgage could be just that for many. by Shannon Hicks
Americans More Worried About Running Out of Money Than Death
Two in three (63%) Americans worry more about running out of money than death, up from 57% in 2022. Concerns about inflation, Social Security, and taxes contribute to the fear. Gen Xers are the most likely to say this with 71% more worried about running out of money than death, compared to 64% of millennials and 53% of boomers. By the numbers: High inflation (43%) is the most common concern contributing to worry about running out of money. Published by Darryl Hicks
Practical advice on becoming your parents financial guardian
Our parents looked after us, protected us, and taught us everything we needed to navigate our lives into adulthood. It’s the kind, compassionate and loving thing to do for them when it’s clear they need our help. Though the conversation may be uncomfortable – no one wants to hear that they may not be as sharp as they once were – it’s still one that we owe to them. It’s also important to remember that they are still your parents and deserve to be afforded the same respect and dignity as you’d always shown, no matter how diminished their capacity. Read on for some pointers from Home For Life Reverse Mortgage. Some Signs It May Be Time to Take Charge Keeping an Eye on Your Parent Installing a smart camera in your parent’s home can be a prudent measure if you’re concerned about their ability to manage their affairs independently. This technology offers a discreet way to monitor their daily activities and behaviors, helping you ensure their safety and well-being from afar. It can alert you to any unusual or concerning patterns that might indicate a need for intervention or assistance. To make the most of this setup, it’s important to keep troubleshooting resources handy. This ensures that any technical issues can be swiftly resolved, maintaining a seamless connection to your loved one’s environment. By integrating smart technology responsibly, you can provide support and peace of mind for both you and your parents. Evaluating Assisted Living Options Evaluating local assisted facilities becomes a crucial step when your parent can no longer live independently. This process involves more than just touring facilities; it requires a deep dive into the experiences and feedback from those who have first-hand experience with these communities. Consulting facility reports is essential to understand the level of care, compliance with regulations, and overall quality of the environment. Equally important is reading tenant reviews, which offer invaluable insights into the daily life, staff responsiveness, and the community’s atmosphere from the perspective of residents or their families. These resources combined will provide a comprehensive view, helping you make an informed decision about the best place for your parents to thrive in this new chapter of their life. Your Parents Should Provide These as Early as Possible Downsizing Downsizing to a smaller, more manageable home is a great option for those who do not want to move into assisted living. Start by using this calculator to determine the value of your parent’s current home. You can also arrange for your parents to transfer ownership of their home to you so that you can handle the sale yourself. You’ll also want to have your parent’s new, smaller residence already selected so that you can complete the move as seamlessly and painlessly as possible. A search of local rentals can provide you with a good basis for exploring your options. It’s a good idea to hire professional movers to streamline the process, as well. If Your Parent Is a Business Owner If you don’t want to take over the running of your parent’s business, Synergy Business Brokers notes that you may have to sell it for them once they’re no longer able to manage it. There are different requirements depending on if they are the sole business owner or if they have partners. Or, if the business is a sole proprietorship, an LLC, or a multi-member LLC. First, you’ll need a complete valuation of business, its assets, including real estate and inventory, and debts. You will need access to all the company’s documents like business tax returns, customer and vendor contracts, and building and equipment leases. You’ll want to have an attorney to help with the dissolution of business, but you can save yourself a lot of billable hours by gathering as many documents as you can prior to the formal sale. It can be a relief to both you and your parents, knowing they no longer have to be responsible for their finances. They are free to enjoy the things they are able to do, and you are free to enjoy your time with them without constant worry. It’s what you would want someone to do for you when the time’s come. To learn more about how a reverse mortgage can help you meet your financial needs, visit Home For Life Reverse Mortgage today! By Lisa Gonzalez elderscorp.org
3 moves seniors should consider with inflation still high
With a report released earlier in April showing inflation rising yet again and the prospect of interest rate cuts low for the Federal Reserve’s next meeting, many Americans may find themselves looking for ways to boost their bottom line. This is particularly true for seniors, many of whom may be heavily reliant upon Social Security and retirement savings. For this demographic, in particular, it’s important to explore alternative ways to both protect their existing money — and improve their potential income flow. Fortunately, there are multiple ways to accomplish both goals right now. Below, we’ll break down three moves seniors should consider with inflation still high. 3 moves seniors should consider with inflation still high Here are some moves seniors should investigate as they continue to cope with the high cost of inflation. Invest in gold Gold has historically been a smart and effective way to hedge against inflation and diversify your portfolio, two features that make the precious metal particularly attractive right now. Gold can help offset the negative influence of inflation thanks to a value that tends to remain steady or even rise during such economic periods. And that’s been the case in recent weeks as the price of the metal has surged to record highs. But the diversification it can offer is also key, particularly for seniors with portfolios largely made up of volatile stocks and bonds. In this case, gold can help balance the performance of those assets, offering another layer of protection that’s especially valuable now. Consider a reverse mortgage If inflation and higher borrowing costs have dramatically affected your available cash, homeowners 62 and older should consider turning to a reverse mortgage. This loan, based on your home’s appraised value at the time of application, will only need to be paid back if you sell the property or die. And, while it may not be ideal to tap into your existing equity, particularly if you were planning on leaving it to loved ones following your death, it’s still preferential to going further into debt. For many seniors, it can be a smart way to supplement limited retirement income right now. Review bank accounts The inflation rate last month was 3.5%. The average interest rate on a regular savings account right now is 0.46%. So if you’re keeping your funds in a regular account, you’re losing money and not keeping pace with inflation. As such, it’s important to periodically review your bank accounts for opportunities to further grow your savings. High-yield savings accounts, for example, operate the same way regular savings accounts do, but with an exponentially higher interest rate (up to 6% for some accounts right now). Certificates of deposit (CDs), meanwhile, may come with even higher rates, although they will require savers to lock their money away for an extended period of time. Either account option, however, is generally preferable to the minimal rate you’re likely earning with a regular account now. The bottom line While high inflation and elevated interest rates can be problematic for seniors, there are ways to effectively offset some of the negative ramifications. By investing in gold, for example, seniors can better hedge against inflation and diversify their portfolios. Reverse mortgages, meantime, offer an alternative income source with less baggage than other home equity borrowing options do. And by opening high interest-earning accounts like high-yield savings and CD accounts now, savers can earn significant sums of money simply by switching their savings strategies. As is the case with all financial decisions, however, it’s critical to carefully consider each of these moves in order to improve the chances of financial success. By Matt Richardson