Retirement Strategies -Tapping Into Housing Wealth. Is it ever a good idea?
In the last few years the financial planning world has begun to take a deeper look into housing wealth to smooth the bumps and pitfalls that can occur financially even after retirement. (Loss of a spouse, declining health, not enough savings) There have been some very responsible and well thought out arguments making a case for older homeowners to utilize their housing wealth as a part of a complete retirement plan.
The tool being looked at for this is none other than the Home Equity Conversion Mortgage insured by HUD, commonly known as a “reverse mortgage” . After years of misunderstanding, bad actors and overly simplistic qualifying HUD has in the last few years tightened qualifying requirements, adjusted lending amounts and Mortgage Insurance Premiums making the FHA Home Equity Conversion Mortgage (HECM) safer for older homeowners all the while retaining some of its best features that financial advisors are now feeling comfortable about. Professionals are more often encouraging clients to think about factoring home equity into part of a complete financial plan.
How are folks using the HECM to improve their financial outcomes in their golden years? There are many new articles and even books that spell out different strategies. The biggest positive in the HECM arsenal is its flexibility. A HECM loan can be set up as a growing line of credit that is guaranteed to grow over time* no matter the direction of home values. It can also be set up as a monthly disbursement to the borrower for life (tenure) or for a period of time (term). These options can be adjusted over time depending upon the remaining available credit. And the homeowner can even continue to make mortgage payments should they wish to, as there are no prepayment penalties on a HECM loan. It’s that flexibility that makes the loan so useful even though it takes a bit longer to grasp the nuances of the loan.
One benefit of the HECM loan I would be remiss in not reporting about is the fact that borrowers are never required to make a payment of principal or interest. Borrower requirements though are similar to traditional mortgages in the fact that the homeowner is required to pay the ongoing property charges such as Homeowners Insurance, Property Taxes and HOA Dues (if applicable). A HECM loan also requires the borrower to live in the home as their primary residence.
Here are some of the strategies that financial advisors are considering suggesting in appropriate situations.
Payoff an existing mortgage - increasing monthly cashflow.
Fund Home Renovations to allow for aging in place.
Use tenure payments to reduce portfolio withdrawals.
Taking tenure payments as an annuity alternative
Social Security Bridge - to delay taking social security
Pay Premiums for Long Term Care
Line of credit as a contingency fund for spending shocks (home care, health expense, divorce)
Tax bracket management or pay taxes for Roth Conversions.
Set up a growing line of credit as a “self-funded” long term care policy alternative.
Many older homeowners have a large part of their overall wealth wrapped up in thier home equity and it makes perfect sense to incorporate home equity wealth into your retirement plan.
If you’d like to find out more about how housing wealth can be a part of a holistic approack to retirement planning you might enjoy this book:
Reverse Mortgages, How to Use Reverse Mortgages to Secure Your Retirement, by Wade D. Pfau, Ph.D., CFA
If you'd like to take a deeper look at whether utilizing your home equity as part of your retirement planning through the use of a HECM loan, please call me, Debbie Nance, at (951)283-2983