Financial and retirement fears have intensified since the outbreak of the COVID-19 crisis. Fortunately, savvy homeowners may have a solution.
In hindsight it seems inconceivable, not so much that the COVID-19 crisis did occur, but that it could occur. This novel crisis caught everyone unaware and unprepared for the financial and other yet to be known consequences. As the pandemic unfolds, there are no immediate answers to the multitude of questions, except…everything will be different.
In the wake of volatile financial market actions, financial professionals have been scrambling to help clients remain calm and ride out the storm. Beyond handholding, they are recommending clients avoid panic and premature selling to avoid incurring the treacherous consequences of sequence of return risks. They do, however, urge clients to increase cash reserves and limit spending to conserve cash flow and build liquidity. Clearly, good advice, but easier said than done.
Retirees Threatened Most by Financial Uncertainties
Mandatory shutdowns, loss of income, and battered financial markets wreaked havoc on investment accounts, especially for those that sold investments in the record market selloff that occurred when the pandemic was first announced. While it’s an obvious problem for investors, it can be devastating for retirees relying on investment income and diminished savings.
Temporary Relief from Mortgage Payments – Forbearance
Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, banks were authorized to enable qualified borrowers the ability to defer making monthly mortgage payments up to six months. This is not debt forgiveness as the unpaid amounts are added to the loan balance at the end, but it provides needed relief to household budgets for a while.
Permanent Relief from Mortgage Payments – Reverse Mortgages
Older homeowners (62 and older) may be eligible to refinance to a reverse mortgage that defers all payment obligations permanently. No repayment is required until the homeowner sells or no longer resides in the property. Depending on individual circumstances, all existing liens are paid off eliminating their payment obligations. Further, additional funds or a line of credit will be made available for any surplus. The unique terms of reverse mortgages were developed to meet needs of aging homeowners, who do not want to sell, but wish to remain in their home to age in place.
The HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage is the dominant program nationally, accounting for over 95 percent of all reverse mortgage programs. HECM property value limits were increased from $765,600 to $822,375 effective, January 1, 2021. Further, higher valued properties may be better served by new proprietary or jumbo programs.
Massachusetts – Jumbo Reverse Mortgages Now Available
The Massachusetts Division of Banks recently approved new proprietary (jumbo) reverse mortgages for MA home and condominium owners. These programs provide loan amounts up to $1,500,000 with terms substantially similar to the federally insured HECM with low and no cost options, and without the need for FHA project approval.
Massachusetts Condominiums – New Developments
Until recently, reverse mortgage financing was only available to Massachusetts condominium projects that were fully approved by FHA. Consequently, only eight percent of all condo projects in the state received approval, leaving 92 percent ineligible. This year, two significant changes occurred, expanding and simplifying reverse mortgage financing for Massachusetts condo owners.
- FHA Single Unit Approval. This process enables HECM reverse mortgage financing with simplified and limited FHA approval required. Essentially, it eliminates FHA full project approval.
- New proprietary (jumbo) reverse mortgages approved by the Massachusetts Division of Banks. Now reverse mortgage loan amounts up to $1,500,000 are enabled without FHA approval.
Reverse Mortgage Benefits / Obligations
- 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, borrower(s), and heirs are not responsible for the deficiency as they are protected by FHA insurance.
- Access to funds and loan terms are guaranteed – cannot be frozen or cancelled as long as borrower obligations are maintained.
- 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 primary residence
Financial Advisors Advocate Using Housing Wealth in Financial Planning
- Massachusetts home values have achieved record highs in recent years. Thus far, these values have been less affected by the COVID-19 financial turmoil. Recognizing an opportunity, savvy home owners and planning professionals are exploring best practices to lock in and monetize these values to increase liquidity and future financial security.
- To a large extent, home equity (housing wealth) has not achieved mainstream status in the financial planning process. That is changing. Converting a portion of home equity to a line of credit and/or additional cash through a reverse mortgage is one strategy advisors are now exploring to cope with the financial setbacks and enable clients to maximize use of all their resources.
- Timothy Ehlers, RICP, Financial Advisor, Wood Wealth Group, characterized the reverse mortgage as the Swiss Army knife in the planning toolbox for its versatility in solving a multitude of retirement challenges.
TO LEARN MORE
Get the facts and determine if, or how, the various methods to use housing wealth might work for you now or later. For more information on reverse mortgages, visit the National Reverse Mortgage Lenders Association website www.ReverseMortgage.org, or contact a Certified Reverse Mortgage Professional (CRMP) for a private consultation.
George Downey, CRMP (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