20 Jan 20210 Comments
COVID has affected every single American on some level. More than that, it’s created a wave of reluctant retirees.
According to a recent New School study, older working Americans are faced with a double whammy. Even if they manage to dodge the disproportionately dangerous effects of the virus, they are more susceptible to job loss (than their 35- to 54-year-old counterparts).
A viable safety net for homeowners ages 62 and older – who either cannot gain re-entry to the workforce due to COVID, must compromise with under-employment, or prefer to retire early to avoid the health risks of returning to work – is a reverse mortgage, formally known as a Home Equity Conversion Mortgage (HECM).
Reverse mortgages have come a long way since their introduction and no longer have the pitfalls of the older versions. As you may have seen Tom Selleck say on TV, they are now a smart and safe way to leverage equity. You are using the equity in your home for your current needs and, in most cases, still leaving meaningful value to your heirs without passing on any liability to them.
HECMs are FHA-insured and HUD-regulated. Put simply, they are home equity mortgages that do not require monthly repayment. Between 40 to 60% of a home’s appraised property value can be loaned, depending on age. They can be used to pay off an existing mortgage, relieving the homeowner from monthly mortgage payments, or used to create an additional income stream. Or be used for both.
The key feature for both short-term relief and long-term consideration is that there are no required repayments for any of the loan monies provided to the borrower, as long as the homeowner continues to live in the home as their primary residence, and keeps current on property taxes and home insurance.
You still own your home and you can sell at any time. A HECM reverse mortgage can provide immediate, and likely long-term, relief, and give you time to get your bearings and map out your retirement future. You are spared from dipping into your retirement investments (and suffering the tax consequences) to cover mortgage payments.
Recently, I helped a school administrator, Dolores. After months of lockdown, the thought of physically returning to work made her anxious and panicky. She lives in a blended family with adult children and her 92-year-old mother; everyone felt vulnerable for the family matriarch. The HECM provided Dolores a monthly supplemental income to her early social security benefits, enabling her to opt out of returning to work.
I also helped a couple, Joan and Richard, refinance their previously manageable mortgage balance. Richard’s medical practice had converted to tele-health due to the pandemic, and appointments fell off significantly. Prior to COVID, covering monthly bills was not a concern. Then things got very tight, very fast. Using the HECM reverse, they were able to get out of the modest monthly mortgage payments on the old mortgage, and are now using the HECM line of credit to pay their high property taxes and house insurance.
Unlike Richard, who could see some patients virtually during lockdown, Bonnie and Stan’s heating/AC business entailed servicing clients’ equipment in their homes. Their small business shut down overnight. Although they were already contemplating retirement, COVID made the decision for them before they were ready. Closing their HECM reverse in July was the solution. They did away with the monthly payments on the HELOC balance that was paid off, and set up a monthly draw to replace what had been earned income, to maintain their budget and pay bills.
Many people don’t understand how the HECM works so they are fearful of using it to address their financial pressures. Learning more about how it works is an important first step in finding out if it may be right for you, and if it can help secure your financial future.