Let’s face it; times are changing. The economy and financial markets have faced challenges and increased volatility. In the past, financial planners recommended using home equity as a last resort and letting it appreciate over time. However, home equity should be a part of your long-term retirement plan. Here are several reasons to consider home equity as part of your retirement plan and offset market volatility.
Improve the likelihood of funding your retirement lifestyle
The worst scenario for a retiree is poor market returns in the early years of retirement. It’s known as Sequence of Returns Risk. If you must liquidate investments to fund living expenses during a down market, they won’t have time to let their investments recoup.
If you have to sell stocks when the valuation is down, it can be dire for funding long term retirement plans. Withdrawing money at the beginning of your retirement could have a dramatic effect on the viability of your plan, which is compounded by the need to sell at the bottom of a market cycle. A Home Equity Conversion Mortgage (HECM) line of credit may be the perfect standby to resolve sequencing risks.
Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com states, “in particular during today’s environment, helping to leave the portfolio alone and not spend from it after a market downturn and sourcing that spending from the reverse mortgage line of credit can help to preserve the investment portfolio, and to create long-term positive impact [safety] net as a piece of a reverse mortgage.” 1
Right-size/Relocate to another home
Many people are unaware that a HECM may be used to purchase a new residence. Called a reverse for purchase, this solution provides a way to avoid monthly mortgage payments on a new house without considering an all-cash close. You can also use this financial tool to get more house than you could afford with an all-cash close. You could leverage the equity from your original house to get a more expensive home, have cash left over for your retirement plan, travel, pay for your kid’s education, or anything you want.
Relieve stress caused by monthly mortgage payments
For most homeowners, mortgage payments are the most significant monthly expenses and can cause detrimental stress in retirement. With a reverse mortgage, you eliminate monthly mortgage payments.
Delay starting social security benefits
Delaying social security benefits is a way to increase your retirement income in future years. If you are healthy and don’t require additional monthly income, it could be in your best interest to delay the benefit payments. On average, benefits increase 8 percent every year that you postpone filing from age 62 to 70. Many retirees are using a reverse mortgage as an income bridge to meet their living expenses during this waiting period.
Protect and preserve the value of your home
Per Harvard.edu2, historical data shows that the housing market crashes about every 18 years. However, those figures do not account for significant interruptions, such as a global pandemic. With a reverse mortgage, your home value is locked-in at the time of the loan. If the housing market drops after you secure the reverse mortgage, you won’t have to worry. The reverse mortgage is a non-recourse loan that neither you nor your family will ever have to worry about becoming a more significant burden even if the housing market drops in the future. The HECM LOC can never be frozen or called.
As with any financial instrument, you should understand the reverse mortgage options and consult a financial professional for more information.
©2020 Finance of America Reverse LLC is licensed nationwide | Equal Housing Opportunity | NMLS ID # 2285 (www.nmls.consumeraccess.org) | 8023 East 63rd Place, Suite 700 | Tulsa, OK 74133 | AZ Mortgage Banker License #0921300 | Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act | Georgia Residential Mortgage Licensee #23647 | Kansas Licensed Mortgage Company | Massachusetts Lender/Broker License MC2285: Finance of America Reverse LLC | Licensed by the N.J. Department of Banking and Insurance | Licensed Mortgage Banker — NYS Banking Department where Finance of America Reverse is known as FAReverse LLC in lieu of true name Finance of America Reverse LLC | Rhode Island Licensed Lender | Not all products and options are available in all states | Terms subject to change without notice | For licensing information go to: www.nmlsconsumeraccess.org When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. The lender may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan). The balance of the loan grows over time and the lender charges interest on the balance. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.