With social security only able to go so far for these individuals and couples, home equity is a valuable resource in the right situation.
The baby boomer generation is our retired, retiring and pre-retirement generation – spanning ages 60-78. This generation accounts for approximately 20% of our population and, according to Federal Reserve data, they own an estimated 42% of national real estate, or approximately $18.65 trillion worth of the $44.84 trillion total market. Following reports from AARP, 52.5% of peak boomers have less than $250K in retirement assets with a median home equity of approximately $156,000 – equaling more than half of their total net worth.
With social security only able to go so far for these individuals and couples, home equity is a valuable resource in the right situation. The proper professional guidance can empower many retirement plans and provide options and stability that may not otherwise exist. Yes, there are a variety of inaccurate stigmas that would make one thing that, this is a ‘break glass only in case of emergency’ option or a product provided ‘by loan sharks in dark financial alleys’ just wanting to take mom and dad’s house.
Now, as one of the most regulated products in the mortgage industry, the modern reverse mortgage product deserves to be explored objectively, just as the potential retiring homeowner deserves to have a full understanding of all retirement funding options and their associated pros and cons.
What Exactly is a Reverse Mortgage?
A reverse mortgage is a tool that allows homeowners to convert home equity into useable funds while retaining home ownership. What makes it different from other equity accessing tools is that it does not require a payment with principal and interest compounding against the balance. This can only be done on primary residences and at least one of the borrowing individuals residing in the home must be 62 years or older. There are no-prepayment penalties if the loan is then ever refinanced or paid in full. They are also non-recourse, meaning that the borrower or their estate cannot owe more than the home is worth at time of death or sale. If eligible, they can be used for purchase or refinance transactions.
At the time of moving out of the home or death, the estate has 12 months to either (1) sell the home (at which time the estate would net the remaining proceeds), (2) pay off the reverse mortgage with other assets from the estate and retain the home, or (3) refinance the reverse mortgage and retain the home. The structure of these loans can vary from a retiree taking a large one-time lump sum, structuring a consistent monthly payment distribution to supplement income or even a reverse equity line where, with guidance from a financial advisor, the retiree can distribute what they need when they need it in conjunction with their overall financial plan.
The Equity in Home Equity
Just like an IRA or retirement assets, home equity is a tool that a retiree has invested into the principal but also has experienced market appreciation. However, there are two significant differences in the use of this tool that create high value considerations. First of all, unlike a traditional retirement asset that can experience diminished returns as it is drawn down, your home value continues to appreciate fully with the market, regardless of how much you draw against it.
Secondly, as it is considered a debt, drawing against home equity is not a taxable event, which can help your financial advisor balance out your tax strategies in retirement much more effectively. A reverse mortgage is no exception to the same type of careful planning that all retirement and financial tools must be subject to. Government regulated guides and limits are utilized to protect the retiree’s equity position. The exact retiree age and their amount of equity will dictate how much they can get approved to utilize now and over time. Though exact scenarios and circumstances may vary, huge light bulbs went off for me personally when seeing a simple illustration of a $100K lump sum disbursement. Yes, it’s a loan gaining interest and looking at balance alone can be intimidating; however, based on historic average appreciation, you can see that the estate’s equity or net over time actually continues to grow.
Again, consider it as the right tool for the right time and if you don’t need the supplemental retirement income, then there is no value to this tool for you. However, if the retirement data shared initially is correct, the lives of tens of thousands of retirees could be significantly impacted with the responsible and expertly guided use of a reverse mortgage without doing harm to them or their estate. While my retired mother doesn’t live in Northern Arizona and doesn’t know about this column, she and I are going to have a conversation on this at some point, as I want her to live her best life with all her hard-earned assets and equity in the equation. FBN
By Chris Hallows
For additional information or to schedule an appointment, visit ChrisHallows.Benchmark.us or call 928-707-8572. The Flagstaff location is 824 W Rte 66 Suite A-3.
Chris Hallows is the Branch Manager & Sr. Mortgage Advisor of Benchmark Mortgage Flagstaff.
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