By George Downey
The question of financial security (running out of money) in retirement continues to be the number one concern among aging Americans and financial professionals. Since the Great Recession (2008 – 2013) retirement experts and academics have written extensively on this dilemma, now deemed to be a national emergency.
Add to the long list of research reports on this issue, a working paper from the Center for Retirement.
Research at Boston College entitled Homeownership, Social Insurance, and Old-Age Security in the United States and Europe, by Stipica Mudrazija and Barbara A. Butrica. Clearly, the issue extends well beyond the United States.
One of the more important conclusions is the need to include housing wealth (home equity) as a key component to increase and extend retirement income. In fact, the working paper states, “If the housing equity of older Americans were completely monetized, median household income would increase by over a third – more than in countries like Sweden and Denmark, but well below countries like Spain and Italy.”1
New Considerations for Senior Homeowners in 2019
Thanks to the tax law changes (which went into effect in 2018), including the increased standard deduction, the great majority of senior homeowners will no longer be itemizing deductions, and therefore unable to deduct mortgage interest as they have in the past. This calls to question – What is the best way for older homeowners to manage mortgage debt in retirement? One consideration is refinancing to a HUD/FHA insured HECM reverse mortgage.
Home Equity Conversion Mortgage (HECM) – provides unique planning options
HECMis the HUD/FHA insured reverse mortgage. It was developed specifically to enable senior homeowners (62 and older), who want to remain in their homes, the ability to convert or monetize a portion of their housing wealth to increase financial and retirement security.
In the past, HECMs were mistakenly viewed as a “loans of last resort”. Today, however, they are recognized as important financial planning tools, especially for retirement planning.
Compared to a traditional mortgage or home equity line of credit(HELOC), HECMs have unique terms favoring senior homeowners, including:
NEW STRATEGY – Refinance Current Mortgage to a HECM Reverse Mortgage
This strategy involves replacing current mortgage debt or liens with a HECM reverse mortgage. The purpose is to: (1) convert mandatory monthly payments to voluntary payments; (2) establish a guaranteed growing line of credit; and, (3) enable voluntary payments that will reduce the balance owed and increase the credit line for future needs.
The example above was developed to demonstrate the potential a HECM might provide without any withdrawals along the way. More representative scenarios can be customized to simulate more likely scenarios for individuals based on their circumstances and expectations. These simulations may provide greater insight into the potential value a reverse mortgagemay provide. On the other hand, it may show that a reverse mortgage may not provide the best choice.
For the most part, reverse mortgages have been an overlooked resource due to a variety of misunderstandings and misconceptions. While the program holds great potential for many, it is not a suitable solution for all. Thorough understanding of each individual’s needs and circumstances are essential before a reverse mortgage, or any other program to use housing wealth is employed.
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
1Butrica, B. and Mudrazija, S. (2017, October.) Homeownership, Social Insurance, and Old-Age Security in the United States and Europe (WP#2017-15). Retrieved from http://crr.bc.edu/working-papers/homeownership-social-insurance-and-old-age-security-in-the-united-states-and-europe/
Reprinted from the January 2019 edition of the South Shore Senior News