Senior homeowners urged to consider utilization of housing wealth to increase and extend retirement security while favorable conditions prevail. Home price record surge and low interest rates create strategic opportunity for senior homeowners.
Until recently, housing wealth, the amount of equity built up in the home, has been a largely overlooked financial resource in traditional financial and retirement planning practices. This has changed since retirement experts began sounding alarms that most people near, or already retired, are seriously at risk of running out of money (longevity risk) due to diminished retirement income, inadequate savings, medical and unexpected expenses, and longer life expectancies.
Consequently, retirement researchers and academics have united to promote more comprehensive financial planning that includes housing wealth to increase funds and make them last longer. Since housing wealth is the largest asset of most seniors, it provides older homeowners with an additional resource to enhance and extend retirement security.
SENIOR HOUSING WEALTH – HIGHEST ON RECORD
The National Reverse Mortgage Lenders Association (NRMLA) reported in September that homeowners age 62 and older saw their home equity increase by a combined 2.4 percent to $6.42 trillion in the second quarter of 2017 from $6.27 trillion in Q1-2017.
According to the NRMLA/RiskSpan Reverse Mortgage Market Index, the growth in housing wealth for retirement-aged homeowners was driven by an estimated 2.1 percent improvement in senior home values equaling $162 billion.
The following chart, adapted from NRMLA’s report, illustrates the range and volatility of housing values for senior homeowners in recent years.
Prepared by RiskSpan, Inc. Data Sources: American Community Survey, Census, FHFA, Federal Reserve
CHANGE IS INEVITABLE – ACTION ESSENTIAL
Clearly, the best time to make change is when conditions are most favorable. At the time of this writing, October, 2017, senior home values are achieving record highs and interest rates remain near historic lows. These are ideal conditions for planners and seniors to pause and consider if/how housing wealth might be used to enhance near and long term retirement planning objectives. If appropriate, assessment and action is needed before conditions decline, as surely they will at some point.
PLANNING CONSIDERATIONS
The planning process should begin with a realistic assessment of individual needs, circumstances, and preferences. It is best to address these issues when clear thinking and sound judgements can be made as opposed to waiting until a time of crisis to make decisions about the future. When a significant or unexpected event occurs: judgement is clouded; choices become limited; and, timing control is lost. Basic considerations include:
- Sale. Could this be the right time to sell the house? If not now, when? Why? Why not? Think long term – what would the decision be if/when someone dies, becomes disabled, or an unexpected financial shock occurs? Selling and relocating involves a number of financial, lifestyle, and emotional factors. Planning is best accomplished when you control the terms and the timing – when financial and health conditions are favorable. Certainly, long before a crisis or unexpected event occurs that may force decisions and actions that may not be desirable.
- Refinance. For those that do not want to sell, but instead wish to remain at home and age in place, refinancing to a reverse mortgage may be a sound choice. The HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage was designed specifically for this purpose. HECMs enable senior homeowners 62 and older to monetize a portion of their home equity with unique terms, including: (1) voluntary payments – monthly payments are optional, not required; (2) establishes a guaranteed and growing line of credit; (3) pays off current mortgage and lien obligations; (3) non-recourse loan – no personal liability; (4) no maturity date – payoff not required until no borrower resides in the property; and (5) FHA insurance protection guarantees loan balance owed will never exceed home value at time of repayment.
While reverse mortgage terms are exceptionally well suited for senior homeowners, they are not a good fit for all. Suitability is determined by consideration of each individual’s needs and circumstances along with complete understanding of the HECM program. Unfortunately, a few bad actors, early program weaknesses, and inaccurate media reporting created numerous misconceptions and negative assumptions about reverse mortgages.
Fortunately, a number of program and regulatory changes have strengthened and improved the HECM program along with increased consumer protections. The HECM reverse mortgage has become a key resource facilitating the integration of housing wealth management into financial wealth management. Properly managed, a reverse mortgage adds to financial resources providing: (1) additional cash flow and liquidity; (2) reduction of longevity and other risks; and, (3) protection of financial assets under management.
Home Equity Lines of Credit (HELOCs) and traditional mortgage refinancing options may be a consideration, but are usually less favorable for senior homeowners. For the most part, HELOCs and traditional mortgage loans require more rigid financial and credit qualifications, mandatory payments, and provide fewer funding choices. However, depending on borrower qualifications and needs these programs should be considered, especially if the financial need is short term, or includes special needs a HECM may not satisfy.
While market conditions may be favorable today, change will come, and most likely, when least expected. Astute planners and seniors will update plans and investigate the potential rewards of including housing wealth as an integral component to improve retirement planning.
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