For the majority of older Americans thinking about retirement planning, their single greatest asset is their home. Today’s seniors are facing a confluence of factors which make maintaining their standard of living, and providing for their care increasingly difficult. The average 75 year old American has less than $30k in liquid savings, but $200k or more in home equity. This is the classic case of being home rich and cash poor.
An often unknown or misunderstood tool for seniors today is a Home Equity Conversion Mortgage or “HECM” as they are often called. You may also see TV commercials referring to them as “Reverse Mortgages.” HECM’s allow borrowers to access the equity they have built up in their home over the course of ownership. For seniors who own their home outright, HECM’s can provide access to substantial sums of money. Accessing your home’s equity can play an integral part of reaching your retirement goals such as ageing in place, covering out of pocket medical expenses, or even contributing to grandchildren’s college expenses.
The traditional Home Equity Conversion Mortgage carries a fixed interest rate, and provides a lump sum payment of your home’s equity. However, a Home Equity Conversion Mortgage Line of Credit or HECM-LOC is an alternative to the traditional lump sum payment. The line of credit option allows you to access your equity up to a predetermined sum at any time in any amount. An additional benefit is that you only pay interest on the balance of equity utilized. This can also be a safer option for individuals planning to access MassHealth type benefits for long-term care, making it easier to avoid mismanagement of funds which could result in costly periods of gaps in coverage. The HECM-LOC does carry a variable interest rate opposed to a fixed.
In the case of either a traditional Home Equity Conversion Mortgage, or a line of credit, there are upfront fees, interest costs, and other fees associated with the loan. They should not be entered into lightly, and are ill-suited to those seeking to access small amounts of equity, as the costs are too high. Moreover, credit counseling is required through a HUD certified agency prior to obtaining the loan. If you’re thinking about estate planning, and how to make sure you don’t outlive your savings, contact the Law Office of Frank V. Grimaldi today.
For direct program information from HUD, you may visit https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmhome