Protecting and increasing retirement savings is critical to retirement security. Using savings to pay mortgage or other debt is a formula for failure. Smart use of housing wealth may provide a solution.
Financial advisors agree, the primary fear among aging Americans is fear of running out of money in retirement. Unfortunately, the majority transition into retirement with accumulated debt, reduced incomes, and insufficient savings to last lifetimes that are increasing as life expectancies continue to rise
Debt Payments – A Serious Threat to Retirees
Making timely mortgage and other debt payments is an established priority to maintain financial wellbeing and creditworthiness. Considering the consequences, when income levels decline borrowers naturally default to spending savings to meet payment obligations. Cannibalizing savings to make debt payments may solve the immediate need, but it significantly increases the dreaded risk of running out of money.
Potential Solution – Smart Use of Home Equity
Home equity (housing wealth), easily the largest asset of most individuals, constitutes two-thirds of the average senior’s net worth, but it is not liquid. Smart use of home equity requires: (1) selling and relocating, or (2) refinancing the home to a mortgage program that meets their needs and financial circumstances without jeopardizing retirement savings.
Surveys consistently show the majority want to age-in-place in their current home. However, financial and other circumstances may determine the best solution is to sell. If so, action plans to address the physical and emotional considerations for change need to be developed. For those who do not want to sell, refinancing to a reverse mortgage may be a better choice.
Reverse Mortgage – A Solution for Some, Not for All
Reverse mortgages were developed to enable older homeowners (60 and older), who want to remain in their homes, the ability to access a portion of their home equity without the obligation to make mortgage payments. The terms are uniquely designed to accommodate retirement finances as well as certain legal considerations homeowners encounter as they transition into retirement. Most importantly, among other options, funds can be used to eliminate mortgage and other debt payments to preserve savings and extend financial security.
Reverse Mortgage Overview
- No monthly payment obligations – prepayments are permitted without penalty but not required. Monthly charges are deferred and accrue.
- Credit line growth – the undrawn balance of the credit line grows (compounding monthly) at the same rate charged on funds borrowed.
- No maturity date – repayment not required until no borrower resides in the property.
- Non-Recourse loan – neither borrowers nor heirs incur personal liability. Repayment of loan balance can never exceed the property value at the time of repayment. If loan balance exceeds property value at time of repayment, the lender and borrower(s) are protected by FHA insurance.
- Access to funds and loan terms are guaranteed – cannot be frozen or cancelled as long as the loan remains in good standing.
- Borrower obligations (to keep loan in good standing) are limited to:
- Keeping real estate taxes, liability insurance, and property charges current
- Providing basic home maintenance
- Living in the property as the primary residence
TO LEARN MORE
Get the facts and determine if, or how, the various options to utilize housing wealth may enhance your individual needs and circumstances. For more information, visit the National Reverse Mortgage Lenders Association (NRMLA) website www.ReverseMortgage.org, or feel free to contact me for a private consultation.
George Downey (NMLS 10239) is the CEO and founder of Harbor Mortgage Solutions, Inc., Braintree, MA, a mortgage broker licensed in Massachusetts (MB 2846), Rhode Island (20041821LB), NMLS #2846. Questions and comments are welcome. Mr. Downey can be reached at (781) 843-5553, or email: GDowney@HarborMortgage.com