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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.
Individuals aged 62 and above may qualify for a reverse mortgage.
Lenders generally allow borrowing capacity of home equity within this range.
FHA Home Equity Conversion Mortgage with counseling requirement.
California cooling off period after counseling before application acceptance.
The Good, the Bad and the Ugly: Buyer Beware
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.
Conflict-Free Perspective
Independent guidance, not mortgage sales.
What a Reverse Mortgage May Help Address
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.
Background
Reverse mortgages have been around since 1961, launched by a widow, and were initially pursued by widows to live in their home and access funds after their spouse passed.
Consumer Protection
There has since been a good amount of protective legislation and consumer protection for borrowers, and therefore reverse mortgages have become more mainstream.
Neutral Guidance
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.
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. Obviously, we are well-versed in this space to provide guidance and direction.
Home Equity Strategy
Liquidity, retirement income and estate planning considerations.
When a Reverse Mortgage May Be Relevant
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.
Important Reverse Mortgage Rules and Requirements
Individuals aged 62 and above may qualify for a reverse mortgage based on the equity they have built in their property.
Age and Equity
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.
HELOC Challenge
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.
HECM Counseling
The Federal Housing Authority insures a reverse mortgage known as a FHA Home Equity Conversion Mortgage. One-on-one reverse mortgage counseling is required to receive a HECM loan.
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.
Home Appreciation, Interest Accrual and Portfolio Offsets
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.
Potential Uses of Home Equity
Cover living expenses, medical expenses and other retirement needs.
Use home equity without immediately selling the home.
Age in place while paying for necessary repairs or care services at home.
Access monthly payment options or a credit line.
Reverse Mortgage Benefits and Drawbacks
Here’s an overview of importance, considerations, benefits and drawbacks.
Increased cash flow: provides more income for retirees on a budget.
Home ownership retained; can live in the home and still draw money from it.
Stable income stream from the asset: with expert help, the investment can provide stable income from the loan which covers interest and other living costs.
No monthly payments: borrowers do not have to pay monthly mortgages, which helps them to relax their finances.
Non-recourse loan: borrowers and heirs are not responsible for the value of the home after the loan is repaid.
Tax-free proceeds and easier payment flexibility.
The loan balance grows as interest is accumulated, reducing home equity.
Costs and closing costs may be high, including origination fees, closing costs and mortgage insurance premiums.
The reverse mortgage must be repaid after death or move out of the householder, inducing heirs’ income.
Eligibility requirements include age, home equity and use of home as principal residence.
Potential for forced foreclosure if property taxes, insurance or maintenance obligations are not met.
Using the reverse mortgages in the right way helps you to be sustainable in the interest and to smoothen the waves.
Capital Gain Exclusion and Advisory Convenience
Single Exclusion
For singles, the exclusion is $250,000.
Joint Filing Exclusion
For joint tax spouse tax filings, this amount is up to $500,000 of that gain.
Primary Residence Rule
Homeowners must have lived in the home as their primary residence for two out of the last five years.
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
Need Independent Guidance Before Considering a Reverse Mortgage?
Click here to email and schedule a no obligation complimentary initial advisory meeting and portfolio review.
Serving Santa Barbara, Los Angeles and Surrounding Counties
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
Email: contactus@mcapitalmgt.com
nvestment 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.
