Security through Home Equity
Work with a Certified Specialist
California is one expensive place to live, and that can make it a difficult place to retire. The average baby boomer today is expected to live for 20 years in retirement after working for 40 years. This means that – even with social security coming – baby boomers should’ve been saving around 33% of their total income throughout their working years in order to retire comfortably. For most Californians though, the idea of saving 33% of one’s income (especially if one has to worry about college funds, etc.) seems ridiculous.
To make matters worse, very few people retiring today are afforded the pensions that were the cornerstone of their parents’ retirement plans. And while 401k’s and IRA’s are sufficient for some, they’re significantly underfunded for the vast majority of retirees. So what is the solution to this seemingly intractable problem of retirement so many older Californians face?
One solution available to some California homeowners age 62 and older is a reverse mortgage, also known as a home equity conversion mortgage (HECM). For homeowners who qualify, reverse mortgages eliminate the need for making a monthly mortgage payment, freeing up their income for other things, be they home repairs, travel, medical bills, or anything else a reverse mortgage borrower may want or need. Additionally, depending on the amount of equity homeowners have built up in their homes, they may opt to receive a cash payment or payments as part of their reverse mortgage. These borrowers may choose to receive payment(s) in the form of:
an upfront, lump sum payment;
monthly payments for a predetermined period of time;
monthly payments for the life of the loan;
a line of credit (which can be set up without the need for taking out any money initially);
or any combination of these.
As the above payment options imply, reverse mortgages aren’t only for seniors in financial distress. For example, many wealthy seniors, at the recommendation of financial advisors, are now setting up a reverse mortgage line of credit to use in times when the stock and bond markets are down and it would be detrimental to sell much of their investment portfolio to pay for living expenses. These savvy seniors use their reverse mortgage lines of credit for living expenses during economic downturns (when interest rates tend to be low), and later use investment proceeds to pay down their mortgage when the stock market recovers. Economists have shown this strategy can greatly extend the life of retirement funds.
And today it’s even possible for seniors to buy their ideal retirement home using a special reverse mortgage called a HECM for purchase. With a HECM for purchase (also called an H4P), homeowners contribute a large down payment (usually some or all of the proceeds from the sale of their present home) as a down payment for a new home, and get a HECM for purchase to pay for the rest. This option allows seniors to purchase the property that’s right for them in retirement, and enables them to buy a more expensive home than they might otherwise be able to, and/or save cash for other investments and expenses, all while eliminating the need to pay monthly mortgage payments.
While a reverse mortgage can be a great financial tool for some older homeowners, it’s very important to understand that reverse mortgages are loans which must eventually be repaid. While borrowers of reverse mortgages are not required to make monthly mortgage payments, when the home is sold, refinanced, or the borrower and his or her spouse pass away or stop living in the home, the loan balance becomes due to the lender. For this reason, a reverse mortgage may sometimes not be the best option for borrowers whose number one priority is maximizing the amount of home equity they pass on to their heirs. Additionally, there are three main ways reverse mortgages have historically gone wrong for borrowers:
It’s not made sufficiently made clear to borrowers that even with a reverse mortgage, they (the borrowers) are still responsible for paying for the home’s property taxes and homeowner’s insurance. If a reverse mortgage borrowers neglect to pay for property taxes and insurance, or they don’t keep the home in a safe and habitable condition, it can result in the lender foreclosing on the property.
Borrowers are encouraged by unethical loan officers to cash out more home equity upfront than they need or want. This results in a bigger commission for the loan officer, and the preservation of less equity for the borrower.
Borrowers are encouraged by unethical loan officers to take a younger spouse off title to the property to enable the borrower to receive a larger reverse mortgage loan. While this can result in more, short term access to cash for a borrower, it can also result in the borrower’s spouse losing the right to live in the home should the borrower be first to pass away.
Of course, these potentially tragic situations arise because a loan officer is unethical and/or incompetent, and doesn’t adequately explain what a reverse mortgage is and how it works. As a certified, reverse mortgage specialist with C2 Financial Corporation, one of the largest mortgage brokerages in the country, I’ve undergone extensive training on reverse mortgages, and understand the responsibility that attends working with seniors considering a reverse mortgage.
I start every consultation with seniors laying out the options and considering with them whether a reverse mortgage is the right kind of product for their situation. In some instances, a cash out refinance can be preferable, and in other situations building an ADU to improve monthly cash flow can be the best of all options. If you think a reverse mortgage or any of these other options may be right for you and/or your loved ones, don’t hesitate to contact me for a free consultation today.