By George A. Downey
The home, long thought of as “a great investment,” needs a second look. Why? How can this be, considering that property values in many regions have risen to record levels, further increasing the value of home equity – now referred to as “housing wealth”? In fact, for most senior homeowners, housing wealth is by far their largest asset. So, what’s the problem?
Good investments enable the owner ready access to the funds to meet cash flow or liquidity needs. Generally, this means providing access to all or a portion of the value as may be needed. Clearly, selling the home provides access to the entire value, but the majority of seniors surveyed (more than 80 percent) don’t want to sell. They want to stay at home and age in place. They only need access to a portion of the value. This is the problem as the rules for borrowing have changed.
Before the Great Recession (2008 – 2013), borrowing on home equity was easy. In fact, too easy as the wave of sub-prime and indiscriminate mortgage lending created the recession that crippled the U.S. economy. Since then, the rules governing lending have changed. Regulators and lenders across the country tightened up on borrowing requirements. The new rules impose more rigid income and credit qualifications, thus eliminating or restricting borrowing capabilities for some.
Retirees living on fixed and limited incomes may not qualify for loans that were easily obtained only a few years ago. Unfortunately, many don’t realize these changes have occurred, and assume they will be able to borrow in the future as before. These restrictions apply to virtually all mortgage lending including traditional first and second mortgages, home equity lines of credit (HELOCs), and the FHA insured Home Equity Conversion Mortgage(HECM) reverse mortgage.
NEW EQUITY RELEASE PRODUCTS
Responding to the growing needs of retirees to monetize home equity without selling, new solutions are coming to market, including: sale-leaseback agreements; real estate equity option agreements; home sharing arrangements, and other innovations that enable homeowners the ability to generate funds without selling the home.
HOME EQUITY LINES OF CREDIT (HELOC)
HELOCs, in recent years have been the most widely used loan program to borrow on home equity. They featured low upfront costs and minimum interest only payments during the draw period (usually 7 to 10 years). While the draw period is open, funds can be borrowed up to the loan limit and repaid as the borrower choses. When the draw period ends, the credit line is closed and monthly payments are increased (amortized) to repay the loan balance by the maturity date.
The abrupt end to low interest only payments and ongoing access to additional funds catches some borrowers off guard, as they were unaware, or simply forgot this provision. Consequently, the new income and credit rule restrictions many prevent them from refinancing, and leave them stuck with the shock of higher payments.
The FHA insured Home Equity Conversion Mortgage(HECM) is the dominant program in the U.S. constituting more than 95 percent of all reverse mortgages, and the only reverse mortgage program available in Massachusetts at this time. New proprietary (jumbo) programs are being reviewed by the Division of Banks and are expected to be available in the near future.
The HECM reverse mortgage, developed by HUD/FHA, enables senior homeowners (62 and older) the ability to utilize a portion of accumulated home equity to increase and extend financial security. The terms are tailored to the needs and circumstances of aging homeowners with limited resources. Features include: no monthly payment obligations (payments are optional), no personal liability, no maturity date (repayment not due until no borrower resides in the home), a growing line of credit, and more. Borrower obligations are limited to: (1) keeping home owner insurance and real estate taxes current; (2) performing basic maintenance; and (3) residing in the home as a primary residence.
The HECM program provides unique provisions that fit the needs of many seniors, but not all. The program is not well understood by most consumers and financial professionals, and has been plagued by earlier deficiencies as well as misconceptions. In recent years, the program has undergone a series of modifications by FHA and industry leaders. These changes instituted a number of improvements to consumer protections as well as increasing program benefits.
The value and importance of housing wealth should not be overlooked in retirement planning. Properly utilized, it may significantly increase and extend financial security. The key is education and planning. Successful planning is based on each individual’s circumstances, objectives, and understanding of the various choices available to meet those objectives.
Retirement planning is best accomplished with the guidance of a Registered Investment Advisor (RIA) or Chartered Financial Planner (CFP). You are welcome to call us for the names of financial professionals in Massachusetts that include housing wealth in their financial wealth management practices.
To learn more about the various options and programs to utilize housing wealth, please feel free to contact us for more information.
About the Author
George Downey (NMLS 10239) is the 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