Four Ways to Tap Your Home Equity in Retirement

| June 21, 2017 | 0 Comments | Email This Post Email This Post
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By Paul Fiore

Home prices have surged in recent years and older Americans now hold collectively $6.2 trillion in home equity. That’s an average of more than $200,000 per senior household with equity.

However, for many seniors it feels like the roof is caving in. That’s because their income from savings and retirement accounts is not keeping up with increasing expenses.

The gap between income and expenses is creating a very real financial crisis for seniors. It’s clear that home equity has to be part of the solution, whether it’s reverse mortgage loans, home equity lines of credit, relocations or other options.

Reverse mortgage loans are generally the best product for seniors to tap home equity. The Federal Housing Administration (FHA)-insured Home Equity Conversion Mortgage (HECM),commonly referred to as a reverse mortgage loan,is specifically designed to meet the needs ofAmericans aged 62 or older.

FHA allows eligible seniors to structure their HECM loan proceeds in any combination of these four ways:

  1. Full or partial lump sum payment –allows seniors to request a lump sum payout at closing, at a fixed interest rate. If they opt to receive their money all at once during the first year, a withdrawal cap applies, which leaves less available for them to borrow than the line of credit or monthly payment option.
  2. Line of credit –gives seniors the freedom toselect the disbursement amount that is right for them, draw fromtheir loan whenever they choose,and accrue interest only on the amount that they borrow. Importantly, the credit line grows every year, at roughly the mortgage interest rate, increasing the amount they can borrow in the future.
  3. Monthly payouts– there are two options that provide monthly payouts: monthly tenure or fixed term. With the monthly tenure option, seniors receive payments from their lender each month for as long as theylive in their home and continue to meet the loan requirements. With the fixed term option, how long they receive payments is up to them. Because of the shortened amount of time they receive a monthly payout, the amount of theirmonthly disbursement is higher than it would be with the tenure option. After the term expires, the proceeds from the reverse mortgage loan stop, and they can continue living in their home as long as they continue to meet their loan requirements.
  4. HECM for Purchase – allows seniors to purchase a new principal residence and obtain a reverse mortgage in a single transaction. With this option, they can relocate to other geographical areas or downsize their homes with a HECM loan.

 

Importantly, under any of these payout options, in order to stay in their home, seniors must continue to meet the loan requirements, including paying their property taxes, homeowners insurance and other property charges, and maintaining their home.

 

About the Author

Paul Fiore

Executive Vice President of Retail Sales, American Advisors Group

aag.com

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