The number of financial products available to senior homeowners is growing. Access to home loans, lines of credit, and reverse mortgages appears to be improving. But what is the best option for you?
Rising expenses and uncertainty
Many older homeowners are on a fixed income. The challenge many face is that expenses, such as health care costs, are not fixed. Health care costs are certainly not fixed.
At the same time, more boomers and seniors are realizing that their children are not financially supporting themselves. Fortune and The Pew Research Center find that although young adult unemployment fell to around 8% in mid-2015, even fewer are now living independently than in 2010 (just 67%). However, financial expert Dave Ramsey warns that “The biggest expense facing baby boomers today is not their children’s college bills, but their parents’ elderly care.”
Many retirees are also finding that they are far less satisfied than expected. The stock market has not been kind and is still estimated to be 60% overvalued. At the same time, the Social Security Administration continues to warn that there won’t be enough money to pay what is owed.
Fortunately, trillions in home equity are being recovered. However, many Americans are realizing that they are rich at home and cash poor again. Liquidity and cash are key to surviving and enjoying the coming years.
So what are the best ways to tap into underutilized home equity?
Conventional Mortgages, Second Mortgages and Lines of Credit
The Mortgage Bankers Association and Mortgage Credit Availability Index show that access to mortgage credit has been increasing since February 2012. Inman News attributes this in large part to the expansion of mortgage programs.
Conventional mortgages, second mortgages, and home equity lines of credit (HELOCs) are all options. However, the traditional versions of these loan programs present a number of challenges and drawbacks for older homeowners.
In particular, this includes:
1. Difficulty qualifying for home mortgage loans
2. The need to consistently generate income to pay the mortgage payments
3. High interest rates on 2nd mortgages
4. Potential Lenders to Limit or Close Lines of Credit During Housing Recessions
5. Leaving large debts and monthly financial obligations for the heirs
How do HECM reverse mortgages work?
A HECM is the FHA reverse mortgage program. This is a federally sponsored and guaranteed home equity conversion mortgage. Allows homeowners age 62 and older to convert home equity into liquid, usable cash and credit.
The real beauty of this financial tool is that it pays the homeowner, not the other way around.
Reverse mortgage payments are flexible and can be customized to your personal needs.
Your funds can be taken as a lump sum, monthly payments over a specific time period, monthly payments over your lifetime, drawn from a line of credit, or a combination of these options.
The most flexible option is the line of credit.
Highlights of a reverse mortgage line of credit include:
1. A built-in growth feature that constantly adds access to more funds over time.
A. A reverse mortgage line of credit grows at a compound rate (interest rate +1.25%)
b. Any payments made to your principal balance will also increase your line of credit by the same amount. Your increased line of credit will grow at the compounded rate, giving you more money to use in the future.
2. A reverse mortgage line of credit is ‘open credit’, you can borrow or pay money back without penalty.
3. Once established, your line of credit works regardless of the value of your home and the balance of your loan.
4. Cannot be taken away during market downturns (as long as you meet your contractual obligations, like paying property taxes and homeowners insurance).
5. May be established in early retirement years and reserved for future liquidity while maintaining a minimum balance of $100.
6. It can be used to avoid taking money out of investment accounts during market downturns or it can be used instead of taking Social Security income until your benefits are maximized.
The cash from your reverse mortgage line of credit can be used for anything from paying credit card bills to home repairs, helping children and parents, gifts for grandchildren, investing, and covering medical bills. Or just keep it as a reserve fund. It’s your money, you choose.
Know more…
Having more liquidity is a pressing problem for millions of Americans today. Traditional mortgages and HELOCs can sometimes be more of a nuisance and threat than a benefit for aging homeowners. Unlike; A reverse mortgage line of credit can help homeowners get ahead of their financial needs without adding to their burden. Is your money. Make sure you make the most of it!
Check out the Reverse Mortgage Calculator to see what you’re entitled to today.
