Senior homeowners have a choice – most make the wrong decision, and don’t know it.
Seniors in, or nearing, retirement are confronted with a dilemma – most have failed to save enough for a secure retirement.
Moreover, since the baby-boom generation (born after 1946) entered retirement years, 10 to 12 thousand are retiring every day. Predictably, this trend will continue through 2030. Retirement experts identify this to be an individual and a national emergency.
Understandably, great numbers of seniors and their advisors are exploring ways to extend savings by using home equity wealth in combination with financial wealth to meet current and future needs. Further, the great majority of seniors state strong preferences to remain in their homes and age in place. So, short of selling the home, the options are limited with most opting to borrow through a traditional home equity line of credit (HELOC) or a reverse mortgage. The dominant reverse mortgage program (over 95%) is the HUD/FHA insured Home Equity Conversion Mortgage (HECM).
Industry records reveal HELOCs are selected nine out of 10 times over HECMs. Why? The answers are not surprising considering what most know (or think they know) and don’t know about reverse mortgages:
- Lack of knowledge. Homeowners, especially seniors, are familiar with and understand traditional (forward) mortgages. HELOCs offer a low or no cost option that provides ready access to funds when needed, are easy to obtain, and require minimum interest only monthly payments. HECMs, on the other hand, are not well understood and generally viewed in a negative or questionable light as being more expensive, complicated, difficult to get, and promoted by self-serving lenders.
- Misconceptions and myths. Misunderstandings of reverse mortgages are prevalent and, unfortunately, serve to discourage examination at the outset. Common misleading notions include: the lender takes ownership of the house; nothing will be left for the kids; someone told me a reverse mortgage was not a good idea, or it should only be used as a last resort. These and other misconceptions have deterred many from learning more.
- Uninformed advisors. Seniors generally have experienced long and comfortable relationships with their bank and other advisors, and typically look to them first for advice and recommendations. Most banks aggressively promote their in-house HELOC program, yet don’t offer HECMs and are not well versed on their attributes or suitability for seniors. As well, friends and other advisors are equally uninformed about reverse mortgages and default to recommending a HELOC, which they are more familiar with.
Making the right choice between a HELOC and a HECM is considerably more important than most realize. The right decision requires thoughtful considerations of individual needs and circumstances as well as integration with near and longer term objectives. Too frequently, conclusions are reached without adequate information and/or from advice from others who may not be qualified, or who may be motivated by conflicting interests in the outcome.
Both programs have their place and, like most things in life, have pros and cons, costs, and responsibilities. Which one is the best fit should be evaluated on its suitability for each individual.
The following chart compares some of the main points that distinguish HECMs from HELOCs and should be considered before a decision is made to choose either.
To Learn More
Home equity (housing wealth) is the largest single asset in most households. Thanks to the record setting increases in Massachusetts home values in recent years, housing wealth has become an important and valuable resource to improve financial planning and extend retirement security. If, how, and when to use it is a key question. Every situation is different and the options are increasing as new programs emerge to meet the changing times. If you would like to learn more and explore the possibilities you are welcome to call us for more information or to schedule a private meeting.