Retirement often comes with liquidity and income constraints: Is a Reverse Mortgage for you?
Montecito Capital Management, a financial advisory firm serving communities in Santa Barbara and Los Angeles offers independent guidance and counsel for homeowners considering a reverse mortgage. First, there are the good, the bad and the ugly products out there, so "caveat emptor," buyer beware. The takeaway is that some reverse mortgage providers are superior to others, the different reverse mortgage options should be tailored to each individual's circumstances, and it is advisable to have an independent third-party professional determine whether a reverse mortgage is the right pathway.
For clarity, we are not licensed to sell reverse mortgages, are in no way in the mortgage business and do not accept (nor are licensed for) commissions, and therefore we offer conflict-free financial advice as Fiduciary advisors.
Reverse mortgages are financial products designed primarily for older homeowners, allowing them to convert a portion of their home equity into cash without having to sell their home or make monthly mortgage payments. By way of background, reverse mortgages have been around since 1961, launched by a widow, and were initially pursued by widows to live in their home and have access to funds after their spouse passed. There has since been a good amount protective legislation and consumer protection for borrowers, and therefore reverse mortgages have become more mainstream. Indeed, the myth that the lenders want to take your home isn't really relevant given all the safeguards in place and the fact the lenders only allow 40%-60% borrowing capacity of home equity. That said, there is complexity in the type of loan options relative to the individual homeowner's circumstances, and it is recommended you seek financial advice from a neutral third-party, such as a financial professional. Obviously, we are well-versed in this space to provide guidance and direction.
Here’s an overview of their importance, considerations, benefits, and drawbacks:
A reverse mortgage may be appropriate for those who have a considerable amount of equity in their home and plan to live there for the foreseeable future. This financial solution is particularly relevant for individuals who lack adequate retirement income and/or savings. Seniors facing substantial costs in their later years, including healthcare, inflation, or income shortfalls, might find monetizing home equity value as a viable solution.
Additionally, a reverse mortgage can also be a superior estate planning tool for heirs given a trust has been established, to where any remaining equity in the home can pass to beneficiaries after death with the 2024 benefit of the federal tax exemption in the amount is $13.61 million per individual. In contrast, should a retiree sell their home to access the equity value, any amount of gain more than the primary homeowner exclusion would be subject to capital gain taxes.[1]
Individuals aged 62 and above may qualify for a reverse mortgage, which allows them to access funds based on the equity they have built in their property, which translates into a cash borrow opportunity for those candidates that already have substantial equity value in their home. Retirees who do not want to sell their home yet need access to additional funds to meet their lifestyle in retirement should at least consider the pros-cons of a reverse mortgage for cash needs in their golden years. Further, many in their late 60s and older are out of the work force and now have limited "earned" income, which makes it difficult for retirees to "qualify" for access to equity with a home equity loan (HELOC).
The Federal Housing Authority ("FHA") insures a reverse mortgage known as a FHA Home Equity Conversion Mortgage (HECM). One-on-one reverse mortgage counseling is required to receive a HECM loan, and a HECM Counseling certificate is issued to counseling recipients as proof that the counseling occurred. Other reverse mortgage programs may also have counseling requirements. There is also a fairly new California law that requires a “7 day cooling off period” before a lender or broker can accept your reverse mortgage application and no fees may be assessed upon a prospective applicant until after 7-days from the date of counseling, which is technically the 8th day following counseling.
For most retirees, their home is the largest asset and for California residents, the home has delivered an impressive unrealized gain. According to realtor.com, California has one of the highest five-year homeowner appreciation returns in the country at 34%, with the 10-year being an astounding 78% return. What this also means is that should the home continue to appreciate in line with historical trends, the home equity appreciation will help offset the interest accrual on the reverse mortgage. Indeed, the interest accumulates with the loan amount and is paid when the home is later sold, or should the homeowner, or their heir, choose to pay off that loan.
Another potential cost offset is having an income portfolio of investments from the loan proceeds that your financial advisor can implement to deliver a range of 6%-7% return. For example, Montecito Capital Management specializes in providing income portfolios for retirees and this stable income return source could help meet lifestyle needs without drawing much from the principal of the portfolio or could help offset the interest cost of the reverse mortgage loan.
Retirees often rely on a combination of Social Security benefits, pensions, and personal savings to fund their retirement. As retirees navigate the complexities of financial security, many find themselves exploring various strategies to optimize their income. One such strategy is the use of proceeds from a reverse mortgage, which can play a crucial role in creating a sustainable income portfolio. By understanding how to utilize these funds effectively, retirees can help offset interest costs and manage their cost of living without exposure to sharp drawdowns from their investment portfolios. An income portfolio, composed of diverse investments, can help ensure a steady cash flow.
Importance of Reverse Mortgages:
1. Financial Flexibility: Reverse mortgages provide seniors with access to funds that can help cover living expenses, healthcare costs, or other financial needs, especially during retirement when income may be limited.
2. Home Equity Utilization: They allow homeowners to tap into the equity they have built up in their homes, providing a way to leverage this asset for additional financial support.
3. Aging in Place: Reverse mortgages can enable seniors to remain in their homes longer, as they can use the funds to cover necessary home modifications or to pay for in-home care services.
Helpful and Useful Aspects:
1. No Monthly Payments: Borrowers are not required to make monthly mortgage payments, which can ease financial strain during retirement.
2. Non-Recourse Loan: Reverse mortgages are typically non-recourse loans, meaning that the borrower or their heirs will not owe more than the home’s value when the loan is repaid.
3. Tax-Free Proceeds: The funds received from a reverse mortgage are generally not considered taxable income, allowing seniors to use the money without tax implications.
4. Flexible Payment Options: Borrowers can choose how they receive the funds—lump sum, monthly payments, or a line of credit—providing flexibility based on their financial needs.
Pros:
1. Increased Cash Flow: Provides additional income for retirees who may be on a fixed budget.
2. Home Ownership Retained: Homeowners can continue to live in their homes while accessing funds, and the home equity can still appreciate with that ownership share.
3. Potential for Increased Quality of Life: Access to cash can improve living conditions and reduce financial stress.
4. Cash from equity can create stable income stream: With help of a professional advisor, a steady income stream from the proceeds of the loan can be established to help offset the interest and cost of living.
5. Potential estate tax benefits: The alternative of having to sell the home exposes the estate, assuming there is a trust in place, to capital gains taxes for the amount of gain exceeding the homeowner exemption. Further, under this scenario, the homeowner would have to move from their home and seek a new residence. For more information on income portfolios from Reverse Mortgage proceeds: Montecito Capital Management Launches Proprietary Income Portfolio from Reverse Mortgage Loan Proceeds
Cons:
1. Accumulating Debt: The loan balance increases over time as interest accrues, which can diminish the equity in the home.
2. Costs and Fees: Reverse mortgages can come with high upfront costs, including origination fees, closing costs, and mortgage insurance premiums.
3. Impact on Inheritance: The amount owed on the reverse mortgage will need to be repaid upon the homeowner's death or when they move out, potentially reducing the inheritance for heirs.
4. Eligibility Requirements: Borrowers must meet certain criteria, including age (typically 62 or older), home equity levels, and the home must be the primary residence.
5. Potential for Foreclosure: Should the borrower become negligent in basic homeowner responsibilities, even after being notified of this fact from lender, and fails to meet basic obligations such as paying property taxes, homeowners' insurance, or maintaining the home, then they violate loan terms and could be placed at risk of foreclosure.
Conclusion:
Reverse mortgages can be a valuable financial tool for seniors looking to enhance their retirement income and maintain their quality of life. However, it is essential to weigh the pros and cons carefully and consider individual financial situations and long-term goals before proceeding with this option. Consulting with a financial advisor can provide additional insights tailored to specific circumstances.
[1] For singles, the exclusion is $250,000. To qualify for the capital gain exclusion, homeowners must have lived in the home as their primary residence for two out of the last five years. For joint tax spouse tax filings, this amount is up to $500,000 of that gain.
To best serve at the convenience of our clients, advisors also regularly travel within 120 mile radius of both the Central & Southern California offices to meet clients at their homes, businesses or for lunch advisory meetings at privacy-appropriate restaurants.
Prospective clients outside our region are also welcome to contact our firm.
Wealth Management Team Leader:
Kip Lytel, CFA®, MBA
Click Here to Email & schedule a no obligation complimentary initial advisory meeting & portfolio review:
SERVING SANTA BARBARA COUNTY, VENTURA COUNTY & SAN LUIS OBISPO COUNTY
Montecito Capital Management
225 East Carrillo Street, Suite 203
Santa Barbara CA 93101
(805) 965-7955
SERVING LOS ANGELES COUNTY, SAN BERNARDINO COUNTY & ORANGE COUNTY
Montecito Capital Management
522 S. Sepulveda Boulevard, Suite 207
Los Angeles, CA 90049
(805) 965-7955
Investment Firm Offices serve San Luis Obispo County, Santa Barbara County, Ventura County, Los Angeles County & Orange County
Disclaimer: The website provides general information regarding our business along with access to additional investment related information. Material presented on this website is believed to be from reliable sources and is meant for informational purposes only. The intent is to provide helpful information, which should NOT be construed as investment advice. We do not guarantee its accuracy, nor completeness, and it is not intended to be the primary basis for investment decisions. We do not make personal investment recommendations to people or entities except to those who have engaged us expressly for the purpose of providing professional investment advisory services. Investing involves risk and possible loss of principal capital. Montecito Capital Management Group’s ADV filing is available online at http://www.adviserinfo.sec.gov and current FORM ADV Part 2, which describes the services offered, fees charged and detailed company information, among other things, is available upon request free of charge. To a certain degree we are limited in our fiduciary capacity by the firm's non-discretionary client relationship, whereby the client dictates the investment parameters and contractually agrees to accept sole responsibility for their choices.
For clarity, we are not licensed to sell reverse mortgages, are in no way in the mortgage business and do not accept (nor are licensed for) commissions, and therefore we offer conflict-free financial advice as Fiduciary advisors.
Reverse mortgages are financial products designed primarily for older homeowners, allowing them to convert a portion of their home equity into cash without having to sell their home or make monthly mortgage payments. By way of background, reverse mortgages have been around since 1961, launched by a widow, and were initially pursued by widows to live in their home and have access to funds after their spouse passed. There has since been a good amount protective legislation and consumer protection for borrowers, and therefore reverse mortgages have become more mainstream. Indeed, the myth that the lenders want to take your home isn't really relevant given all the safeguards in place and the fact the lenders only allow 40%-60% borrowing capacity of home equity. That said, there is complexity in the type of loan options relative to the individual homeowner's circumstances, and it is recommended you seek financial advice from a neutral third-party, such as a financial professional. Obviously, we are well-versed in this space to provide guidance and direction.
Here’s an overview of their importance, considerations, benefits, and drawbacks:
A reverse mortgage may be appropriate for those who have a considerable amount of equity in their home and plan to live there for the foreseeable future. This financial solution is particularly relevant for individuals who lack adequate retirement income and/or savings. Seniors facing substantial costs in their later years, including healthcare, inflation, or income shortfalls, might find monetizing home equity value as a viable solution.
Additionally, a reverse mortgage can also be a superior estate planning tool for heirs given a trust has been established, to where any remaining equity in the home can pass to beneficiaries after death with the 2024 benefit of the federal tax exemption in the amount is $13.61 million per individual. In contrast, should a retiree sell their home to access the equity value, any amount of gain more than the primary homeowner exclusion would be subject to capital gain taxes.[1]
Individuals aged 62 and above may qualify for a reverse mortgage, which allows them to access funds based on the equity they have built in their property, which translates into a cash borrow opportunity for those candidates that already have substantial equity value in their home. Retirees who do not want to sell their home yet need access to additional funds to meet their lifestyle in retirement should at least consider the pros-cons of a reverse mortgage for cash needs in their golden years. Further, many in their late 60s and older are out of the work force and now have limited "earned" income, which makes it difficult for retirees to "qualify" for access to equity with a home equity loan (HELOC).
The Federal Housing Authority ("FHA") insures a reverse mortgage known as a FHA Home Equity Conversion Mortgage (HECM). One-on-one reverse mortgage counseling is required to receive a HECM loan, and a HECM Counseling certificate is issued to counseling recipients as proof that the counseling occurred. Other reverse mortgage programs may also have counseling requirements. There is also a fairly new California law that requires a “7 day cooling off period” before a lender or broker can accept your reverse mortgage application and no fees may be assessed upon a prospective applicant until after 7-days from the date of counseling, which is technically the 8th day following counseling.
For most retirees, their home is the largest asset and for California residents, the home has delivered an impressive unrealized gain. According to realtor.com, California has one of the highest five-year homeowner appreciation returns in the country at 34%, with the 10-year being an astounding 78% return. What this also means is that should the home continue to appreciate in line with historical trends, the home equity appreciation will help offset the interest accrual on the reverse mortgage. Indeed, the interest accumulates with the loan amount and is paid when the home is later sold, or should the homeowner, or their heir, choose to pay off that loan.
Another potential cost offset is having an income portfolio of investments from the loan proceeds that your financial advisor can implement to deliver a range of 6%-7% return. For example, Montecito Capital Management specializes in providing income portfolios for retirees and this stable income return source could help meet lifestyle needs without drawing much from the principal of the portfolio or could help offset the interest cost of the reverse mortgage loan.
Retirees often rely on a combination of Social Security benefits, pensions, and personal savings to fund their retirement. As retirees navigate the complexities of financial security, many find themselves exploring various strategies to optimize their income. One such strategy is the use of proceeds from a reverse mortgage, which can play a crucial role in creating a sustainable income portfolio. By understanding how to utilize these funds effectively, retirees can help offset interest costs and manage their cost of living without exposure to sharp drawdowns from their investment portfolios. An income portfolio, composed of diverse investments, can help ensure a steady cash flow.
Importance of Reverse Mortgages:
1. Financial Flexibility: Reverse mortgages provide seniors with access to funds that can help cover living expenses, healthcare costs, or other financial needs, especially during retirement when income may be limited.
2. Home Equity Utilization: They allow homeowners to tap into the equity they have built up in their homes, providing a way to leverage this asset for additional financial support.
3. Aging in Place: Reverse mortgages can enable seniors to remain in their homes longer, as they can use the funds to cover necessary home modifications or to pay for in-home care services.
Helpful and Useful Aspects:
1. No Monthly Payments: Borrowers are not required to make monthly mortgage payments, which can ease financial strain during retirement.
2. Non-Recourse Loan: Reverse mortgages are typically non-recourse loans, meaning that the borrower or their heirs will not owe more than the home’s value when the loan is repaid.
3. Tax-Free Proceeds: The funds received from a reverse mortgage are generally not considered taxable income, allowing seniors to use the money without tax implications.
4. Flexible Payment Options: Borrowers can choose how they receive the funds—lump sum, monthly payments, or a line of credit—providing flexibility based on their financial needs.
Pros:
1. Increased Cash Flow: Provides additional income for retirees who may be on a fixed budget.
2. Home Ownership Retained: Homeowners can continue to live in their homes while accessing funds, and the home equity can still appreciate with that ownership share.
3. Potential for Increased Quality of Life: Access to cash can improve living conditions and reduce financial stress.
4. Cash from equity can create stable income stream: With help of a professional advisor, a steady income stream from the proceeds of the loan can be established to help offset the interest and cost of living.
5. Potential estate tax benefits: The alternative of having to sell the home exposes the estate, assuming there is a trust in place, to capital gains taxes for the amount of gain exceeding the homeowner exemption. Further, under this scenario, the homeowner would have to move from their home and seek a new residence. For more information on income portfolios from Reverse Mortgage proceeds: Montecito Capital Management Launches Proprietary Income Portfolio from Reverse Mortgage Loan Proceeds
Cons:
1. Accumulating Debt: The loan balance increases over time as interest accrues, which can diminish the equity in the home.
2. Costs and Fees: Reverse mortgages can come with high upfront costs, including origination fees, closing costs, and mortgage insurance premiums.
3. Impact on Inheritance: The amount owed on the reverse mortgage will need to be repaid upon the homeowner's death or when they move out, potentially reducing the inheritance for heirs.
4. Eligibility Requirements: Borrowers must meet certain criteria, including age (typically 62 or older), home equity levels, and the home must be the primary residence.
5. Potential for Foreclosure: Should the borrower become negligent in basic homeowner responsibilities, even after being notified of this fact from lender, and fails to meet basic obligations such as paying property taxes, homeowners' insurance, or maintaining the home, then they violate loan terms and could be placed at risk of foreclosure.
Conclusion:
Reverse mortgages can be a valuable financial tool for seniors looking to enhance their retirement income and maintain their quality of life. However, it is essential to weigh the pros and cons carefully and consider individual financial situations and long-term goals before proceeding with this option. Consulting with a financial advisor can provide additional insights tailored to specific circumstances.
[1] For singles, the exclusion is $250,000. To qualify for the capital gain exclusion, homeowners must have lived in the home as their primary residence for two out of the last five years. For joint tax spouse tax filings, this amount is up to $500,000 of that gain.
To best serve at the convenience of our clients, advisors also regularly travel within 120 mile radius of both the Central & Southern California offices to meet clients at their homes, businesses or for lunch advisory meetings at privacy-appropriate restaurants.
Prospective clients outside our region are also welcome to contact our firm.
Wealth Management Team Leader:
Kip Lytel, CFA®, MBA
Click Here to Email & schedule a no obligation complimentary initial advisory meeting & portfolio review:
SERVING SANTA BARBARA COUNTY, VENTURA COUNTY & SAN LUIS OBISPO COUNTY
Montecito Capital Management
225 East Carrillo Street, Suite 203
Santa Barbara CA 93101
(805) 965-7955
SERVING LOS ANGELES COUNTY, SAN BERNARDINO COUNTY & ORANGE COUNTY
Montecito Capital Management
522 S. Sepulveda Boulevard, Suite 207
Los Angeles, CA 90049
(805) 965-7955
Investment Firm Offices serve San Luis Obispo County, Santa Barbara County, Ventura County, Los Angeles County & Orange County
Disclaimer: The website provides general information regarding our business along with access to additional investment related information. Material presented on this website is believed to be from reliable sources and is meant for informational purposes only. The intent is to provide helpful information, which should NOT be construed as investment advice. We do not guarantee its accuracy, nor completeness, and it is not intended to be the primary basis for investment decisions. We do not make personal investment recommendations to people or entities except to those who have engaged us expressly for the purpose of providing professional investment advisory services. Investing involves risk and possible loss of principal capital. Montecito Capital Management Group’s ADV filing is available online at http://www.adviserinfo.sec.gov and current FORM ADV Part 2, which describes the services offered, fees charged and detailed company information, among other things, is available upon request free of charge. To a certain degree we are limited in our fiduciary capacity by the firm's non-discretionary client relationship, whereby the client dictates the investment parameters and contractually agrees to accept sole responsibility for their choices.