The decision to Age in Place is increasingly more complicated.
Numerous studies have established the great majority of aging Americans want to remain in their homes for the rest of their lives. However desirable that wish may be, retirement experts caution it might be a mistake.
A panel of experts on aging and retirement discussed the subject at a meeting hosted by the Urban Institute’s Housing Finance Policy Center. Among the conclusions, research associate Karan Kaul (2019) explained in his blog, American Seniors Prefer to “Age in Place” – But What’s the Right Place?:
Staying in a home must be financially sustainable, but it should also maximize physical, social, and emotional well-being. Financial considerations include maintenance and repair costs and the cost of necessary safety retrofits (grab bars, lifts, ramps, etc.), as well as the general cost of living in that area.
The Big Question – Long term, is the home affordable and suitable?
If the answer to either affordability or suitability is no, then consideration to selling and relocating is a must. At the time of this writing (June, 2019), residential buying demand and property values in Massachusetts are the highest on record. From a purely financial perspective, selling the home may warrant serious consideration. Too often, this choice is overlooked, or not considered, in objective and effective planning.
Using the Home to Stay at Home
The largest asset of most homeowners is home equity. Properly, planned and utilized it may hold the potential to significantly increase and extend financial security throughout retirement years. The most effective resource to accomplish this is the HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage program.
HECMs were established by Congress to enable senior homeowners (62 and older), who want to remain in their homes, the ability to monetize a portion of their home equity to increase and extend financial security without selling or moving.
HECMs are unique loans designed to accommodate the limited financial circumstances and longer term needs of non-working retirees. Moreover, they have proven to be a valuable financial planning tool for affluent homeowners seeking to maximize future cash flow and liquidity resources.
Compared to a traditional mortgage or home equity line of credit (HELOC), HECMs have unique terms favoring senior homeowners, including:
- No requirement to make monthly payments.
- Credit line growth – the undrawn balance of the credit line increases (compounding monthly) to provide more funds later to offset living cost increases.
- No maturity date – loan repayment never due until no borrower resides in the property and the loan remains in good standing.
- Non-Recourse loan – neither borrowers nor their heirs incur personal liability.
- Funding amount established at closing – not affected if future property value declines.
Best Time to Start a HECM to Maximize Future Funding Capabilities
The ideal time to start a HECM reverse mortgage is when the youngest borrower turns 62. The purpose is to take advantage of the guaranteed credit line growth rate. This is especially true when funds are not needed immediately – called a “standby line of credit”. The earlier start engages the full potential of monthly compounding growth, which is guaranteed even if property values decline.
A common but costly mistake occurs when one assumes application should be made later when funds are actually needed. Although more funds are available to older individuals, numerous studies have conclusively proven this wrong. The differences are principally the result of the earlier start date and monthly compounding, which is baked into the credit line growth calculations.
Clearly, the capability to utilize housing wealth most effectively lies in effective planning. Properly used, it can have profound effect on improving and extending retirement security. The key is education to understand the issues, ramifications, and the choices that may be available to determine which, if any, may be best for each individual.
To Learn More
Harbor Mortgage Solutions, Inc. is providing free consultations and customized reports on housing wealth utilization to senior homeowners, their family members, and professional advisors. Simply call or email us for more information.