In my work, I talk with many seniors. Many are reluctant to leave their homes even when those homes are no longer suitable for their needs. Sometimes, the concern is emotional, but more often than not, it’s financial. What happens if they sell their current home but can’t cover the costs of a new place, especially in a market characterized by record-high home prices?
Many seniors aren’t aware of a sensible financial tool that could ease their worry and help them thrive during their golden years: the home equity conversion mortgage, also called a reverse mortgage. Or, if they are aware of this option, they may view it with skepticism based on longstanding misconceptions. This is a shame because the lack of accurate and current information prevents seniors from considering all their options. Over the years, I’ve made it my mission to educate consumers, real estate professionals, and financial planners so that more seniors can get the advice they need to make intelligent and informed decisions.
The truth is that many financially savvy seniors use home equity conversion mortgages as part of a broader financial planning strategy to enhance their cash flow and minimize withdrawals from investment portfolios.
My client, Barbara (a pseudonym used for privacy), offers a good case study. After her husband passed away, she realized she was living in “too much house” and wanted to move closer to her grandkids. She was prepared to sell, but the proceeds would not be enough to cover a cash purchase near her family. Although she and her husband had spent a lifetime building up a retirement fund, she was understandably nervous about making those funds last. At the suggestion of her financial advisor, we walked through her options to purchase a new home:
Pay cash for a new home by pulling a lump sum out of her retirement income to supplement the proceeds from her home sale, which might result in a larger tax bill from the distribution and would certainly cut down the time those assets would serve her during her lifetime.
Take out a traditional mortgage requiring a monthly payment of principal and interest, which would increase the amount of her monthly retirement distribution, again potentially resulting in a higher tax bill and most definitely decreasing the life of her retirement funds.
Use a reverse mortgage with her purchase loan to boost her purchasing power without requiring principal and interest payments during her lifetime.
By supplementing the net income from selling her existing home with a reverse mortgage for purchase, Barbara improved her purchasing power by almost 40%. Still, she also avoided pulling any additional money from her retirement funds and eliminated a monthly mortgage payment at the same time. She used her most significant asset, her home, to help ensure she would thrive throughout her retirement. Like Barbara, I recommend consulting a financial or tax advisor as part of the borrowing process.
Despite the outdated misconceptions around these highly regulated mortgage products, they are an innovative financial tool when used wisely in an overall financial plan. We owe it to our seniors and their advisors to ensure that current and accurate information is available and easy to understand. When homeowners are armed with knowledge, understand the benefits and the potential risks, and know the right questions to ask, they can make the best decisions for their longstanding health and financial wellness.
Lisa Moriello is the National Reverse Sales Manager at loanDepot.
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