Posts Tagged "home equity loan"

A small house

Home Equity Rises. Reverse Mortgages Don’t

The housing market has shrugged off the pandemic, and home prices are rising sharply due to historically low interest rates. The market crash more than a decade ago is a distant memory.

Home Equity graphThe total value of the equity in older Americans’ homes has doubled since 2010, hitting $8.05 trillion at the end of last year. The irony is that federally insured reverse mortgages, which allow a long-time homeowner to cash in on tens of thousands of dollars of equity, aren’t very popular.

Last year, only 42,000 Home Equity Conversion Mortgages (HECMs) were sold – half as many as in 2010 – according to the U.S. Department of Housing and Urban Development (HUD).

One reason HECM reverse mortgages haven’t caught on, as the Consumer Financial Protection Bureau notes, is that they might not be suitable to homeowners who eventually sell their house. As the loans accrue interest, the “balance is likely to grow faster than their home values will appreciate,” the agency said.

But most retired homeowners never move, and HECMs are one option for people who are short on income. “We accept it as ‘normal’ to spend-down 401(k) funds, yet somehow home equity is sacrosanct,” said Dave Gardner, a former mortgage broker who sometimes handled reverse mortgages. Retirees, he said, should consider this question: “Could you achieve a better result and extend the lifespan of your nest egg with a reverse mortgage?”

To qualify for the loans, borrowers must be at least 62. They can take the reverse mortgage proceeds in the form of a lump sum, line of credit, or monthly payments – or some combination of these.

Curious homeowners can check out the federal government’s new pamphlet, which explains the basics of reverse mortgages. It’s aimed at people who already have the loans but is just as useful for people who are curious about using one themselves.

Before proceeding with any complex financial transaction, however, it’s critical to do due diligence. A reverse mortgage is no different. …Learn More

brain and money

Retirees Who Tested Well Added More Debt

A new study finds that debt burdens have grown for older workers and retirees in recent decades. But this isn’t the first research to reach that conclusion.

What is new is whose debt burden is increasing the most: the people who score higher on simple memory and math tests.

Across the three age groups the researchers examined – 56-61, 62-67, and 68-73 – the high scorers on the cognitive tests were more likely to have debts exceeding half of their assets in 2014 than the high scorers who were the same ages back in 1998.

They also added disproportionately more mortgage debt than people with lower cognition during the study’s time frame, a period when house prices were rising.

The upshot of this study is that people who have retained more of their memory and facility with numbers are “more financially fragile” than the high scorers were in the past, the University of Southern California researchers said.

The findings run counter to a common belief that financial companies in recent years have had more success selling their increasingly complex products to unwitting borrowers – a belief perhaps fostered by the subprime mortgages targeted to risky borrowers in the mid-2000s that triggered the global financial collapse.

Older Workers taking on more debtThe share of the older people in the study who were carrying debt increased between 1998 and 2014 regardless of their cognitive ability. The biggest jump occurred after 62 – a popular retirement age pegged to Social Security eligibility.

The heart of the analysis, however, is exploring the connection between cognitive ability and financial vulnerability. The researchers found the opposite of what one might expect: debt problems have loomed larger over time for those with higher scores on survey questions testing word recall and cognitive ability using simple subtraction and backward-counting exercises. …
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Mortgage Paid Off

Readers See Pros, Cons to Paid-off Mortgage

Baby boomers love to discuss this age-old question: Should I pay off the mortgage before retiring?

Our blog readers fell into two camps in their comments on a recent article.

Some made an emotional argument – that a mortgage-free retirement makes them feel secure. The other camp argued that paying off the mortgage does not make financial sense.

The article, “Boomers Repairing their Mortgage Finances,” described research showing that boomers have sharply cut what they owe on their mortgages by paying extra in the years since the housing market bust. People naturally pay more of this debt as they age. But the boomers’ rapid payoffs partly explain why 40 percent to 50 percent of Americans in their 60s no longer have a mortgage, wiping out what is often a retiree’s largest single expense.

Despite the recent payoffs, boomers still trail their parents. Roughly 80 percent of the homeowners born in the 1930s had paid off their home loans by the same age, according to Jason Fichtner’s analysis for the Center for Financial Security at the University of Wisconsin.

As for whether to pay off the mortgage, many boomers don’t have that luxury. After the wave of foreclosures a decade ago, Fichtner found, the homeownership rate for 60-something boomers quickly slid more than 10 percentage points, to around 65 percent. The U.S. homeownership rate has increased in recent years but is still below the pre-recession peak.

The financial argument against paying off the mortgage was made in a blog comment by Tony Webb, a research economist at The New School. “At current interest rates and anticipated inflation rates, mortgage borrowing is almost free,” he wrote.

“All but the most risk-averse should load up on money while it’s on sale,” he said. [Full disclosure: Webb used to work at the Center for Retirement Research, which sponsors this blog.]

Another reader, Beth, said paying off the mortgage “is one cornerstone of a worry-free retirement.” However, she knows “several financially savvy people who for various valid reasons have not paid off their homes.” …Learn More