Note: The pandemic has many people, particularly seniors, concerned about finances; regular contributor Penelope S. Tzougros, PhD, ChFC, CLU, here discusses one option getting a lot of attention.
You are humming along and all is well. Then the real estate taxes increased-again. The phone and cable bills increased too, but after a few long conversations with the companies, you’ve lowered those costs.
When you’re retired, how do you cover rising expenses?
In addition to lowering the cost on services like the phone and cable, you can eliminate some niceties, defer house maintenance, increase income by housing international students*, or restructure your investments for more income.
Despite your prudent efforts, if the gap between income and expenses widens, you may be attracted to a reverse mortgage. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM). It’s a program of the U.S. Department of Housing and Urban Development (HUD). A portion of the equity in your home is disbursed to you. This program might eliminate the gap between income and expenses…
…but be very cautious.
Though you are not paying interest on the HECM as you did with your original mortgage, the loan has fees and charges. The interest is compounded and increases the size of the loan. You are spending your equity. You no longer have a paid-up house. Wasn’t being mortgage-free a goal that represented security to you?
The loan may help you cover your expenses now, but if inflation and expenses increase, will it cover the gap in the coming years?
A few key eligibility requirements for you and your house
- The homeowner is 62 or older.
- This is the primary residence.
- The mortgage is paid off or mostly paid down.
- The borrower must attend housing counseling.
The HUD website explains the whole program very clearly. https://www.hud.gov/program_offices/housing/sfn/hecm/hecmhome
Things to be aware of
- You are responsible for your living expenses and the costs of maintaining your house, including real estate taxes, repairs and insurance.
- If your spouse is not on the loan, and you, the HECM borrower, die, or for twelve months you no longer live there, then the loan is due and payable. Would your spouse qualify for a loan from a bank to pay down the HECM? The disbursements would cease, but the interest charges on the loan would continue to accrue.
- If your heirs inherit your house when it’s secured with an HECM, they must pay the loan due by selling the property or qualifying for a loan to pay down the HECM.
If you are afraid of losing your home, consider the Making Home Affordable Strategy through HUD, which has about a dozen programs; some geared to those who are unemployed, or whose homes are worth less than the mortgage. (https://www.hud.gov/topics/avoiding_foreclosure). These programs may help lower your monthly mortgage payments, reduce the amount you owe on your house, or modify a second mortgage.
Rising expenses—what to do?
1. Ask: if I buy this, does it create money worries or wellbeing?
2. Search for sources of income, rather than taking on debt.
Bio: Penelope S. Tzougros, PhD, ChFC, CLU, became a financial planner in 1986, after serving as a Professor of English Literature at Northeastern University and Hellenic College in Boston. Her desire to demystify money matters led to her writing for radio, television, online courses and three books. The latest book is Your Home Sweet Home: How to Decide Whether You Should Stay or Move in Retirement. In all 50 states, she is registered with, and securities and advisory services are offered through, LPL Financial, Member FINRA/SIPC.
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.