How Home Equity Can Provide Security in an Uncertain Economy
- STAFF WRITER
- 2 days ago
- 5 min read
While this uncertainty can cause stress, it is especially impactful for retirees who rely on portfolio distributions to support their lifestyles. It places them in a very difficult position of having to choose between living on much less or withdrawing in a down market. The latter choice can of course deplete one's portfolio.
There is good news though; your home equity can help protect your retirement assets and support your lifestyle, even in an uncertain economy.
What Is a Home Equity Conversion Mortgage (HECM)?
For adults who are 62+, HECMs enable eligible homeowners to tap into their home equity while living in and owning their homes. For those who still make forward mortgage payments, loan proceeds from the HECM can be used to pay off (refinance) the forward mortgage balance. And unlike traditional loans, HECMs do not require monthly payments. Instead, the homeowner needs to cover the property expenses they already had, such as taxes, insurance and home upkeep. HECMs are the most popular type of reverse mortgage loan today, so much so that many people use the two terms synonymously. What separates HECMs is robust consumer protections, most notably their non-recourse feature. This means that the eventual sale of the home covers the borrower’s obligation, ensuring that HECM borrowers or their heirs will never owe more the value of the home when the loan is due*.
Why Consider Tapping Into Home Equity with a HECM? Why Now Rather Than Later?
As noted earlier, the economy has been extremely volatile. Although the overall outlook is uncertain, it appears that many goods we rely on in our day-to-day lives are going to become more expensive, increasing costs for American consumers by an annual average of $3,800.
The funds from a HECM can help compensate for these higher costs, all while preserving retirement assets for the long haul of an economic recovery.
While home values can remain stable during an economic downturn, as we saw in the “Great Recession” of 2008, home values can also be greatly affected. At the time of this writing, many experts are predicting that home values will
decline to varying degrees depending on regional market factors.
Keep in mind that the payout for a HECM is based on the market value of the home, the expected interest rate and youngest borrower (or non-borrowing spouse) age. In light of this overarching economic uncertainty, acting now could help lock in a far higher HECM payout than if you wait.
How a HECM Can Help—Now and Into the Future
Eliminating Monthly Mortgage Payments
As mentioned earlier, HECMs eliminate mandatory monthly mortgage payments (if they exist) and do not require monthly payments going forward. Borrowers retain the option to make payments for tax advantages**, but they're only required to cover property-related expenses they already manage, such as taxes, insurance and maintenance costs.
Many seniors discover that this additional monthly cash flow provides a valuable buffer for their retirement resources, even during times of economic stability.
Mitigating Sequence of Returns Risk
Sequence of returns risk refers to the danger of a down market occurring during retirement, particularly early in retirement, where negative returns are combined with withdrawals. This can lead to money running out during retirement, which can place immense strain on the retiree. Many retirees use their HECM payout (as described below) to draw upon when the market is down, acting as a shield against sequence of returns risk, potentially giving the investments time to recover.**If you’d like to learn more about sequence of returns risk and other financial aspects of HECMs, please consult with a financial advisor.
Flexible Payout Choices
HECMs provide homeowners with customizable payout options, allowing retirees to tailor their cash flow approach to their retirement objectives and evolving needs, ensuring they have access to necessary funds when they matter most. Below are two payout options that are particularly useful for protecting retirement assets:
Modified Term Payment Plan
This plan provides fixed monthly payments to the borrower for a predetermined period (i.e., 6 months, 12 months, 18 months, 24 months, etc.). For our current economic forecast, this could ensure a steady source of cash flow to shield portfolios and retirement savings from drawdowns while maintaining quality of life. Depending on how much the borrower wants to access monthly, the term payments can be flexible and then will change to a line of credit.
Flexible Credit Line Where Unused Portion Grows Over Time
The HECM line of credit can act as a safety net, allowing retirees to access their home equity whenever they need it. What sets the HECM credit line apart from traditional loans is that the unused portion of the credit line grows over time (thus increasing borrowing capacity) and can never be frozen or canceled due to market conditions.
Secure Your Financial Future in Turbulent Times
As we navigate through these economic uncertainties, a HECM represents a powerful financial solution when it's needed most. By tapping into your home's equity now, you can lock in your home’s value, potentially shield your retirement portfolio from market volatility and create flexible cash flow options that adapt to your changing needs.
Always remember you do not have to go it alone. Our loan officers are here to listen to your concerns, learn about your unique situation and goals, and present you with options—HECMs or otherwise—that can help. If you’d like to secure your financial future, fill out the form below and we can get started.
There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
*This advertisement is not tax or financial advice. Please consult a tax advisor or financial advisor for your specific situation.
Find Out More About Our Loans, Like How Much You May Qualify For. Let’s Start a Conversation!
A HECM line of credit offers many benefits and could be a cornerstone of your retirement strategy, providing enhanced financial flexibility for the future. As a reputable FHA-approved lender, Fairway Independent Mortgage Corporation is committed to providing comprehensive insights into the advantages and drawbacks of utilizing your home equity through a HECM LOC.
HECM LOC and HECM for Purchase In-Person Educational Seminars
Join us for a relaxed Coffee & Conversation as we break down the basics of reverse mortgage loans. Enjoy a cup of coffee while learning how this financial option can support your retirement goals. Bring your questions and let’s chat!
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Connect with one of our Retirement Mortgage Specialist to learn more about what Home Equity Conversion Mortgage loans and if one is right for you and your family.
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