Contrary to popular beliefs that residential real estate has proven to be one of the best investments one could have made, there’s another darker side to the story.
No question, home values in recent years experienced remarkable value increases, especially in eastern Massachusetts. In fact, at the time of this writing, home prices have achieved record levels in many communities. And, senior homeowners are major beneficiaries. Not only have their values skyrocketed, many have paid their mortgage balance down, or off, creating significant amounts of home equity (now called housing wealth). It’s the largest asset for many. So, what’s the problem?
The problem is that a “good investment” is one that can provide liquidity and/or income to meet the owner’s financial needs. Aging homeowners, for the most part, have not saved nearly enough for retirement. Many assume they can simply wait and borrow what’s needed from home equity. Not so easy anymore as the rules have changed…a lot.
The easy and toxic mortgage lending practices that created the scandalous mortgage crisis leading to the Great Recession (2008 – 2013) changed everything. Since then, lending regulations became more restrictive requiring more stringent qualifications to protect the banks and the economy. Unless borrowers can meet these new rules defining minimum income, assets, debt levels and credit scores they will most likely be declined. Consequently, home equity remains trapped, forcing other considerations that include selling to shore up savings.
Advanced Planning Sheds Light on Potential Problems
Caught unaware and unprepared, this unfortunate reality has, and will continue to affect increasing numbers. To avoid this potential dilemma, the answer lies in – you guessed it, education and planning (the earlier the better). Advance planning, especially with a qualified professional, can provide early warning to potential problems as well as discovering of the various ways housing wealth might be used safely and securely.
If keeping the home is important, examination of the federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage is recommended as a starter. The qualifications and terms were designed to accommodate the special needs and circumstances of senior homeowners. This unique program was developed, insured, and supervised by HUD/FHA. The purpose is to enable homeowners (62 years and older), who want to remain in their home, the ability to utilize a portion of their home equity to enhance and extend retirement security without giving up ownership, selling the home, moving, or taking on personal liability.
Compared to a traditional mortgage or home equity line of credit (HELOC), HECMs have unique terms favoring senior homeowners, including:
- No monthly payments are required.
- Credit line growth – the undrawn balance grows as the credit line increases continuously to provide more funds later as living costs increase.
- No maturity date – loan repayment not due until no borrower resides in the property and the loan remains in good standing
- Non-Recourse loan – neither borrowers nor heirs incur personal liability.
- Funding amount established at closing – not affected if future property value declines
Clearly, the capability to utilize housing wealth most effectively is a vital consideration. Properly used, it can have profound effect on improving and extending retirement security. The key is education – understanding the issues, ramifications, and the choices that may be available to determine which, if any, may be best for each individual.