If you have potential gaps in your plan for retirement income, you might consider adding part of your home equity to your planning.
Over the past several years home values have increased dramatically across the US. In response to this, many retirement planners are starting to utilize what for some retirees is their largest single asset — their home.
Multiple mortgage options allow homeowners to tap into their unused home equity. Historically the most popular have been home equity lines of credit (HELOC) that require monthly payments when the equity line is accessed. However, for retirees, a home equity conversion mortgage (HECM) may be the most attractive option, since monthly payments are not required when the equity line is accessed.
Top Retirement Planning Goals:
- Sufficient funds to maintain your lifestyle throughout retirement
- Grow income each year
- Leave a meaningful legacy for heirs
- Reduce taxes to increase spendable income
- Create a source of liquidity for unplanned expenses
Overlooked Wealth
A significant source of wealth for retired investors is the accumulated equity in their primary residence. A report by the Joint Center for Housing Studies of Harvard University shows that for high-income retirees, a large percentage of their personal wealth resides in the value of their primary residence. There is nearly $50 trillion of equity in US homes according to a recent Redfin report. That is an increase of almost 20% over the past two years.
The decision is whether or not to unlock part of that value in your primary residence. If the answer is yes, then the next step is to figure out the best way to do that.
Regarding HECMs, while some people may be reluctant to mortgage (either forward or reverse) their primary residence after retirement, it’s an option that can address several worries about income, lifestyle, long-term care, and staying in the home they love.
What a HECM Offers Qualifying Homeowners
There are some misconceptions about HECMs and the purpose of the product is not always understood. A home equity conversion mortgage (HECM) is a type of reverse mortgage backed by the Federal Housing Administration (FHA) that enables homeowners age 62 or older to convert a portion of their home equity into cash. (Some privately-backed reverse mortgage products have lowered the minimum age to 55.)
- HECM allows homeowners to access a portion of their home equity without needing to sell their home or make monthly mortgage payments
- HECM funds can be received as either a lump sum, monthly payments, a line of credit, or any combination thereof
- The loan is typically repaid when the homeowner sells the home, moves out permanently, or passes away
- HECM loans are insured by the Federal Housing Administration, providing additional protection to borrowers
- Borrowers can continue to live in their home as long as want. The only mandatory home expenses they need to pay are their property taxes, homeowners insurance, HOA fees (if applicable), and maintenance of the home
- HECM loans are non-recourse loans, meaning that the borrowers or their heirs will never owe more than the value of the home at the time of repayment, even if home values fall and the loan balance exceeds the home’s value
Part of an Overall Plan
HECM funds can be used for a wide variety of purposes, including covering medical and long-term care expenses, supplementing retirement income, home renovations, and paying off existing debts, including an existing mortgage.
Since HECM loans access existing home equity, the funds are a tax-free way to expand your financial resources. There can be unmet needs and wants with even the most diligent retirement planning. For example, very few plans fully contemplate the costs of an extended health crisis. The average current cost for adult day health care is nearly $2,000/month, and a home health aide can easily cost between $5,000 and $9,000/month. If you are retiring in-place and need to make improvements to your home, the costs of home renovations have skyrocketed over the past few years.
When creating or updating your retirement plans, consider these key elements:
- Equity in your home is an often-overlooked area of wealth
- A HECM can be a valuable component of your retirement plan
- Put a plan in place for unexpected financial needs and wants
A HECM or reverse mortgage may not be right for everyone, but in this environment of soaring home equity, it is definitely worth evaluating as part of your overall plan. Visit our main website, or our industry-focused subsidiary < https://choosereverse.com/contact/> if you would like additional information about HECM financing.