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HELOCs only add to the problem

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Core Logic reports that the average homeowner is sitting on about  $300,000 in equity. A tidy sum for most whose home represents their largest asset. With more older homeowners struggling to pay their monthly obligations the question arises- should seniors use their homes to pay their bills?

 

Downsizing: A realistic option?

In such circumstances, many financial pundits suggest that selling the home and downsizing may be the best choice. It may very well be for those who may find themselves struggling to maintain their property or who live in an area with a higher cost of living. 

“If you really want to use your home equity in the best way possible, selling the home and downsizing would be the way to go”, said Jay Garvens, business development manager at Churchill Mortgage in a recent CBS Money Watch column. “Simply sell the house, take the cash, and move to a more affordable community. You would then have enough money left over to pay your bills for the remainder of your retirement years”, says Garens.

But is it really that simple? Not exactly.

Older homeowners with an existing mortgage who want to sell and downsize are likely to find their new mortgage payment is not substantially less than the mortgage payment they have today thanks to the average 30-year mortgage rate being more than double what it was three years ago. This begs the question of what is the best way for an older homeowner to extract equity from their home without increasing their already burdensome debt load?

HELOCs only add to the problem

Some may opt for a Home Equity Line of Credit (HELOC) to get the funds needed to cover their monthly expenses. The problem is HELOCs require monthly payments which will increase after the loan’s initial draw period ends. This leaves the homeowner in a worse position having yet another bill to pay each month undermining their need to increase cash flow to meet their monthly obligations. This is where the desire and accessibility to cash can lead to short-term thinking with long-term financial consequences.

The no-payment, optional payment loan

“If there are no other assets to access, a reverse mortgage can be a way to maintain retirement,” David Orsolino, a financial advisor at Strategies for Wealth told CBS Money Watch. “This will allow for tax-free income and allow you to remain in the home.”

Actually, it’s tax-free loan proceeds which are typically not taxed like income. Any additional source of income is subject to federal or state income taxes. Yet, Mr. Orsolino is correct that reverse mortgages can help older homeowners maintain their standard of living in retirement. Wanting to bequest the home to adult children is admirable but should be done knowing that 70% of adult children plan to sell the home they inherit according to a Charles Schwab survey. In such situations, the pragmatism of selling the home overcomes any sentimental misgivings the children may have of keeping their childhood home. 

Older homeowners struggling to pay their monthly bills should consider the following questions:

If I don’t tap into my home equity will we be a financial burden to our children?

Does selling and relocating to a new home make financial sense?

Would getting a HELOC to access cash be the best choice when it only adds to my monthly payments?

Do I want to return to work? If so, am I mentally and physically prepared to do so?

Would my children prefer that we live comfortably and be financially independent instead of inheriting the home?

Not everyone has the equity required to qualify for a reverse mortgage. But for those who do the flexibility of the loan and the boost to their monthly cash flow may be just the answer they’ve been looking for. 

 

 

Shannon Hicks

Editor in Chief: HECMWorld.com
 
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
 
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
 
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.

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2 Comments

  1. The tax question?

    Can the interest on the proceeds from a reverse mortgage be used to pay living expenses be deducted for income tax purposes? For two more tax years the answer is generally no and even when the Trump Tax Act sunsets, the deductibility of such interest is so limited that many times, taxpayers get no income tax benefit whatsoever from its deductibility.

    Yet as the old saying goes, don’t let the tail wag the dog. While income tax deductions can be beneficial being able to afford retirement is even more so. When used properly, reverse mortgages can help turn retirement into a much more enjoyable and positive experience.

  2. To be clear, in the right financial environment HELOCs may not be a poor decision. That is especially true when the prospect lives in an area where home value appreciation is accelerating and the national statutory MCA is rising with it. That is even more true if at the time repayment of principal starts, the prospect can refinance into another HELOC or perhaps into a reverse mortgage.
    .
    But then one has to ask if 1) a) the combined monthly accrual rate for the note interest rate plus b) the ongoing MIP rate when added to 2) the annual kick in the principal limit factor(when applicable) for increased age. are rising faster than the home value appreciation rate. Yet isn’t that an additional risk to the risk that the prospect may be ineligible at the opportune time either because of the prospect’s circumstances or FHA program changes?

    As a liability sage I knew used to tell me, as to lenders, when you need it, they are not lending bur when you don’t need it, you can get far more than at any other time.


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