Why do you rob banks?

“Because that is where the money is”  Willie Sutton 1976 his book Where the Money Was

Over the many months I’ve written this newsletter we’ve discussed the value of delaying Social Security until age 70.  We’ve discussed drawing down on Qualified Plan assets and creating a bridge between quitting one’s job and claiming Social Security, I’ve also mentioned Phased Retirement or working longer as a means of postponing Social Security claiming.  But the elephant in the room for the vast majority of American’s is the equity in their homes.

2/3 of most American Net Worth’s is in their homes!

This 2/3 figure is especially true of lower and middle class individuals where the value of postponing Social Security for at least the higher earner is of utmost importance, especially if longevity runs in the family or the spouse is significantly younger.  Last Saturday I had a phone call from an individual who will turn 66 in September and wanted to start claiming Social Security benefits.  As the conversation progressed, he mentioned he had several bouts with cancer, thus was questioning his own mortality.  However, his wife is 13 years younger whose mother and father are still alive and active, and her own Social Security benefits are much lower than his.  We came to the conclusion that he should delay claiming benefits until 70, thus protecting her should he predecease her.

Bubble Economy

As of this writing we are experiencing 3 bubbles and as we all know Bubble’s Eventually Burst.  We have a Stock Market Bubble, we have a Bond Bubble (low interest rates) and we have a Housing Bubble.  According to Redfin home prices were up 26.3% nationwide from May 2020 – May 2021.  Senior Home Equity increased by $234 Billion to a record $8.05 Trillion according to Reverse Mortgage Daily, May 2021.

Options available for Tapping Equity in Home

Sell existing home and downsize – What’s interesting here is that most American’s don’t want to move and would prefer to keep their existing home and Age in Place.  Be it familiarity, neighbors, friends, community, etc. they don’t want to move.  However, should they decide to Age in Place their current homes might need to be refurbished and updated so that they can continue to live in them.  Things that might need to be changed are steps, wider doorways, ramps, showers, kitchens, etc. to facilitate wheelchairs.  Home health care and home maintenance might also be major issues.  What’s interesting is that a lot of people I know who’ve decided to downsize have paid more and gotten less than the value of their current home!

Take out a Home Equity Line of Credit (HELOC), has been a favorite strategy for many Seniors.  However, one must Qualify for a Home Equity Line of Credit and in most cases one must show significant income to pay back the loan.  A couple of years ago I went to my bank to get a Home Equity Line of Credit and was turned down, because they said I didn’t have enough earned income to qualify.  They didn’t take into consideration I had No Mortgage on my current home or I had significant liquid assets to pay the note off, they only looked at Earned Income!  Last week Wells Fargo joined many other large backs and eliminated personal lines of credit for all their current customers!  Lines of credit can be canceled, must be paid back + interest in a specified timeline.  It is also a Recourse Loan which means that other assets can be attached to satisfy the loan, should the house proceeds be insufficient to pay off the note.

Home Equity Conversion Mortgage (HECM) lovingly referred to as a Reverse Mortgage.  I don’t believe anything is more misunderstood than a HECM loan!  It is a LOAN that one takes out using the Home Equity as collateral for the loan.  In Texas both parties to loan must be over 62 years of age and one must have significant equity in the home in order to make it feasible (based upon ages a good rule of thumb is 50%).  Ways it might work if the intention is to stay in existing home for at least 5 years preferrable 10 years or longer.  3 Primary HECM Strategies;

  1. Pay off existing mortgage (eliminate monthly payments) or free up cash to make renovations to Age in Place or a combination of the two, possibly even free up additional cash for other needs.   Using this strategy might also allow one to create an income stream in lieu of tapping Social Security before age 70!
  2. Create an Irrevocable Line of Credit!  This caught my attention as the best possible use of a HECM loan.  What’s interesting is that if the Line of Credit is not used, it grows based upon the Interest rate one would have paid had they exercised the loan, with no correlation to value of Home increasing or decreasing.  This is also a Non-Recourse Loan (other assets cannot be attached) in the event that the equity in home is less than loan amount.  This line of credit can be used at anytime for any reason be it OPPORTUNITY – EMERGENCY – HEALTHCARE – ETC.  An example;  if your living off withdrawals from a IRA or 401k and we have a bear market, one could use the Line of Credit to create the income you need, so that your not forced to sell stocks during a Bear Market!!!  When the market recovers you can payback the line of credit should you want to.
  3. HECM for Purchase my wife wants a new home (don’t ask), let’s say the cost of a new home is $750,000.  I don’t want or might not qualify for a traditional mortgage and I don’t want to take $750,000 from the sale of my existing home or from my other assets.  I would use a HECM for Purchase and only have to put down approximately $400,000 to buy the new home.  Now I’d have a $350,000 mortgage, but I don’t have to make payments  (Except for taxes, insurance and maintenance) and the mortgage would increase each year as long as my wife and I live and stay in the home as our primary residency.  Should we sell the house we would get whatever the house is worth and pay off the loan and pocket what is left (if we die our kids have the same option).  If the mortgage is greater than the value of the home (Non-Recourse) other assets cannot be attached.  *What’s nice about this option is that I am freeing up $350,000 to use in retirement for whatever (possibly a 2nd home in the mountains to escape summer heat), my wife has the house of her dreams and I don’t have to make any payments!

There are a lot of moving pieces to using a HECM / Reverse Mortgage and it is not for everyone and one needs to explore all positives and negatives (costs) before going down this path, but for many it is an option that should and needs to be explored.

I’ve been intrigued and have studied Home Wealth and Reverse Mortgages for the past several years and even got licensed to better understand and discuss them.  It also allows me the ability to initially consult with clients to make sure their candidates and then the ability to refer them to Mortgage Loan Offices who specialize in this field.

WISH 4 Income

Income is Freedom to do, what you want to do, when you want to do it!  Income can only come from 4 sources W is for Work / Phased Retirement, the I is for Investments, the S is for Social Security & Pensions and the H is for Home Wealth.  The key is to identify what resources are available and then to integrate those resources to create a lifetime income!

If you’d like to know more or discuss any aspects of this newsletter, don’t hesitate reaching out.

Have a great month and keep cool!

Dave Zander, CFP®
MLS# 1603774