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HELOC vs HECM: Why HELOCs may not be the best option for senior homeowners

When it comes to leveraging the value of a home, both a home equity line of credit (HELOC) and a home equity conversion mortgage (HECM, reverse mortgage) are options to tap into your home equity. However, a HELOC is not necessarily the most appropriate option for older homeowners, ages 62+.

HELOC vs HECM: How Do HELOCs Affect Borrowers?

Due to the unprecedented rise of interest rates that started in March of 2022, HELOC monthly payments have doubled, or in some cases tripled and created a strain on borrowers. We have received many calls about homeowners not being able to afford their HELOC payment anymore. Home equity lines of credit come with variable rates. This means that their rate can go up or down based on the decisions of the Federal Reserve — so even if our borrowers took out a HELOC with a low rate, they are now facing much higher interest rates on their monthly payments. Also, HELOC loans mature at either 5 or 10 year intervals. When they mature, the borrower must re-qualify or begin to pay back both principal and interest, typically over a 20 year period with full amortization. This can cause even higher payments and has even led to forcing the sale of the home or foreclosure. With most retirees on a fixed income, the increase in monthly payments at the end of the draw period can be an unwelcome surprise.

Why HELOCs May Not Be the Best Option for Senior Homeowners

Many borrowers in an older age bracket have managed the revolving debt for as long as possible, but now their savings have been depleted as interest rates continue to skyrocket. According to a new GOBankingRates survey of 1,000 people, about three out of four have savings accounts, but the biggest percentage by far — about one in three — have only $100 or less stashed away. American consumers are depleting the “excess savings” they accumulated during the COVID pandemic. Americans’ excess savings from the pandemic peaked at about $2.1 trillion in August 2021 but fell to roughly $500 billion as of this spring, according to estimates by economists at the Federal Reserve Bank of San Francisco.

This problem is most acute with older Americans because of the likelihood that they are on fixed incomes. Even high-yield savings are depreciating assets. Savers with the highest-yield accounts are growing their money at 4.5% while that money loses 7.6% of its buying power.

How Might HELOCs Reduce Your Available Assets?

Many people get a HELOC while they are still working to do home repairs, put a child through school, start a business, etc. —but the problem arises ten years later when they’re living on retirement cash flow that’s about 75-80% of what it used to be prior to retirement. And when their HELOC payment suddenly spikes up a few years after they’ve retired, it may create a serious cash flow problem. With HELOC payments doubling or tripling and savings/IRAs depleting, Americans (specifically older Americans) are really running into a cash crunch. Medical payments, revolving debts, and general inflation are snowballing into a potential bankruptcy looming over many seniors.

Why a Reverse Mortgage (HECM) May Be Your Best Option

This is why it is important to see a reverse mortgage as a financial planning tool, not a last resort. Many borrowers are refinancing from a HELOC to a reverse mortgage, once they realize it’s the better choice in the long run because with a HECM, seniors’ financial stability can’t be jarred by the possibility of a payment spike. A reverse mortgage is like few others you’ve experienced. You have no monthly payment and have access to a line of credit. It turns the equity you’ve built in your home into cash. Depending on the terms you select, you can receive monthly payments, a lump sum, or another payment option. However, it is similar to other loans in the sense that you still own your home, the property must be the borrower’s primary residence, and you still maintain taxes and insurance on the property. You can also sell your home at any time with no prepayment penalty or leave the property to your heirs.

Reverse mortgages are designed specifically to help seniors manage their cash flow. While payments may be piling up and inflation at the highest we’ve seen in four decades, taking out a home equity conversion mortgage, or a reverse mortgage, can be extremely beneficial. Perhaps the two biggest benefits of a HECM are that there are no monthly mortgage payments required and there will be a growing line of credit that can be accessed over the life of the loan. With the average monthly payment on a HELOC now hovering around $800-$1300, obtaining a reverse mortgage presents a major savings opportunity every month.

Contact Us for Help With Your Reverse Mortgage

Utilizing the equity in your home to fund your retirement is a viable option that benefits many seniors. The federally insured reverse mortgage, or HECM, enables homeowners to eliminate their existing monthly mortgage payment. At the same time, it offers a growing standby line of credit for future needs. If you think that a reverse mortgage is right for you – get in touch with Mortgage South today!

Are Your Clients Thinking of Pulling Out of Equities?

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Do you have clients thinking of pulling out of equities due to Bear market fears and volatility? A HECM “reverse mortgage” stand by line of credit can provide security that keeps them invested during trying times.

Any advisor that has served clients through the uncertainty and volatility of a prolonged bear market. Have seen a portion of their clients pull fully out of equities to the detriment of their financial plan and long-term financial security. I personally know several individuals that pulled completely out of markets after the 2008 fanatical crisis and never returned. Several of these are clients of mine that have completed a reverse mortgage. They fortunately saw their real estate value rebound and surpass the value they had prior to the 2008 housing bubble. Unfortunately, they did not get the benefit of seeing their stock portfolio fully recover and accede their losses because they sold their equities at or close to the bottom of the market, and were not given. To add insult to injury, the low interest rate environment that prevailed for more than a decade made investing in instruments like bank CDs basically moot.

Are Your Clients Thinking of Pulling Out of Equities? Consider Pointing Them Toward a Reverse Mortgage.

After thinking of all of my clients that approached me for guidance concerning a reverse mortgage after their retirement resources had languished with little or no return for years. I started to ask myself a question. Would these clients be better off today if they would have leveraged a reverse mortgage during the down years of the economic cycle and held on to their equites in order to see them recover? I believe the answer is yes.

I have been reviewing data from renowned retirement income researcher and author Wade D. Pfau, Ph.D., CFA, RICP(R). Dr. Pfau is the program director of the Retirement Income Certified Professional® designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA. As well, he is a Principal and Director for McLean Asset Management. His data helped me come to my conclusion. He lays out a scenario in his book, Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement (revised for 2022). The section titled, “Reverse Mortgages and the perfect Storm Facing Retirement Income in 2022” contains the following scenario: a client with 1 million invested in 1962 completes a reverse mortgage. The client lets the reverse mortgage line of credit stand by and grow until the market downturn of 1970, 1974 and 1975. In these years, the client runs on the cash flow feature of the reverse mortgage while stopping distributions from their retirement portfolio. By using this strategy, the sequence of return risk would have a portfolio valued at 2.25 million in 1995. The client that stays invested and maintains distributions during these down has a portfolio balance of $0. All of this assumes a 3.95% withdrawal rate from the client’s portfolio.

Reverse Mortgages are Worth a Look for Risk-averse Clients

In closing, all of your clients have heard the following statement through the years. “Don’t panic sell during downturns in the market stay invested! However, we all know that this logic can and does go out the window when the bear is scratching and clawing at the front door. Many of your clients may have been disciplined and or fortunate enough to have put back enough cash to use during down market cycles. I would dare to say that most advisors have just as many or more clients that have not. Many people solely depend upon qualified IRA or 401K account balances that they accumulated in their working years. For these clients I believe the standby line of credit reverse mortgage strategy deserves a hard look.

Credit Crunch

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The coming credit crunch will not affect our client’s ability to access credit. Will it affect yours? Exploring your client’s options sooner rather than later could be critical.

The regional banking crises is real, despite what narrative is being painted by the Fed and we all know it. As consumer and business deposits continue to leave reginal banks for security and better returns, reginal banks are seeing their lending abilities wither. On top of that, the macro-economic uncertainty has led them to tighten lending standards Mid-sized banks, the Fed said in reporting the survey results, seemed particularly stretched.

“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023,” the release said. “Mid-sized banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks.” Most of the news concerning the credit crunch pertains to commercial lending. However, the consumer financing is next on the chopping block. The hot housing market that was induced by the covid-19 pandemic created billions of dollars in additional housing wealth for home owners across America. For instance, in Chattanooga TN the average home price has increased from 166,018 in 2018 to 275,056 in 2023. This is a whopping 64% increase! Nashville TN was just slightly behind with 56% over the same period of time. This unprecedented increase in home equity spurred homeowners to open or increase their existing home equity lines of credit or “HELOC” loans. Many large lenders are not offering HELOC loans due to current market conditions like Chase Bank who stopped taking HELOC applications as of April 17, 2020. However, small to regional credit unions and banks have continued offering these loans. As the credit crunch continues, it is almost certain that these smaller lending institutions will follow the lead of the MEGA banks. When this happens not only will new applications for HELOCs not be taken. Customers with exiting HELOC loans will lose access to their lines of credit because small and regional banks want to avoid the risk of people making a run on their home equity.

For individuals above the age of 62, there is a financing option that protects their ability to access their home equity regardless of economic conditions. Those individuals that have fully paid their home off or have a small mortgage balance can take advantage of the federally insured Home Equity Conversion also known as the “HECM” or “Reverse Mortgage” line of credit option. Unlike the traditional HELOC offered at banks, the HECM line of credit isn’t affected by the lending ability of a bank. Once the reverse mortgage line of credit is established, it is guaranteed to always be available to the borrower regardless of the circumstances of the lender or the economic environment at large. It is also guaranteed to grow for the client based upon the line of credit growth rate established in the loans initial terms. There are many other differences between the bank offered HELOC and the federally insured reverse mortgage. I only wanted to highlight the security that comes with the federally insured HECM in this blog post. The fact is, the reverse mortgage guarantees access to credit and there is no such guarantee that will be provided from a bank offering a traditional home equity line of credit. If an individual 62 or above wants a loan that offers guaranteed access to their home equity, a federally insured reverse mortgage should be explored.

What is “FHA Insurance” on a Reverse Mortgage?

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You may have heard “federally insured” or “FHA insured” when talking about a reverse mortgage loan, but what does that actually mean? It is actually an integral part of the reverse mortgage and extremely beneficial to the borrowers.

A federally-insured reverse mortgage assures that, as the borrower, you will receive certain loan payments as agreed upon by the terms of your loan. Also, you or your heirs will never be forced to repay more than your home is worth to pay off the loan, regardless of the loan’s balance.

This is important because it ensures two things –

The reverse mortgage insurance guarantees that these loan proceeds will be disbursed to the borrower as agreed upon under the loan terms. The loan proceeds are guaranteed even if the lender goes out of business. Similarly, with a line of credit, the lender cannot cancel or freeze the line of credit when this insurance is in place.
The insurance protects all parties in the transaction, including the borrower, the lender, the borrower’s heirs, and the investors who buy the securities backed by the loans. The insurance makes the program possible for borrowers.

“While these [reverse mortgages] got a bad rap in the late 90s and early 2000s, they have changed what needed to change. A reverse mortgage can be an excellent option for qualified borrowers who need to access their home equity and may not have the income or life expectancy to qualify for a traditional first or second mortgage or even a HELOC,” says Eddie Martini, strategic financing and real estate investment advisor at Real Estate Bees, and wealth coach at Martini Legacy.

Like many Americans, you may be concerned about the economy and struggling to manage issues like high inflation and interest rates. At the same time, you may also have enjoyed home price appreciation over the past few years. In Chattanooga, home values have gone up 6.6% over the past year. In Nashville, home values have increased an average of 12.9% over the past year. This home price appreciation has given homeowners significant amounts of home equity to tap into. More home equity, as well as an insured reverse mortgage loan, may be the retirement security you are looking for. And we at Mortgage South want to help you see if a reverse mortgage can help you achieve retirement security. Mortgage South is local and you deal with a professional that has been doing these since their inception. Give Nathan a call, you will not be disappointed even if you find this is not a perfect fit, he can point you in a direction that might help. If you are in Chattanooga or the surrounding area, please call (423) 624-3878. If you are in the Greater Nashville area, please call (615) 657-5878.

Where Are Retirees Moving?

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According to the current population survey, posted on “Hire A Helper” Blog, Over 234,000 Americans moved to retire in 2022, 4% more than in 2021. There are two notable metro areas located in Tennessee, Nashville-Davidson-Murfreesboro, TN (5.3%) and Knoxville, TN (3.2%), which were among the top 10 places retirees moved in 2022.

Tennessee cities continually find themselves on lists naming the top places to live in the United States, for various reasons. Retirees are drawn to Tennessee for its low cost of living and tax friendliness. With its job market developing, particularly in the tech sector, and home prices remaining below the national median, the bang for your buck seems like an easy choice. The state has also seen its older population of those 65 and older climb during the pandemic in 2021 from before the pandemic in 2019.

When you ask where in Tennessee is a good place to retire, Chattanooga is one of the cities to think of first. Both Chattanooga and the nearby mountain community of Signal Mountain have plenty of walking trails and outdoor activities. You’ll also have access to all the amenities you’d get with big-city living, including plenty of restaurants and shops. Over 16% of the population is over 65 years old.

Looking to Middle Tennessee, Nashville and Franklin are some of the top places to retire in Tennessee. History and suburban life make Franklin one of the best cities to retire in Tennessee. Just 20 miles south of downtown Nashville, Franklin is perhaps best known as the site of two Civil War battles. You’ll find plenty of historic attractions, mixed with more dining and shopping options than you’ll find anywhere in Tennessee. Over 12% of the residents of Franklin are over 65. Costs in Nashville are affordable compared to other big cities. If you like downtown living, Nashville could be one of the best places to retire in Tennessee. You’ll get plenty of shopping and restaurants around downtown, with your pick of live music venues in the famed Broadway area.

Tennessee provides natural beauty, a mild climate, urban conveniences and rural peacefulness. With low living costs and quality healthcare, Tennessee is a great state to call home.

How Inflation is affecting seniors and how a Reverse Mortgage could help

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Inflation soared in 2022. According to the U.S. Bureau of Labor Statistics, inflation is around 7% at the start of 2023, but it still towers over consumer prices from just a few years ago. As Coin News’ U.S. Inflation Calculator highlights, inflation rates stood at a mere 1.4% in 2020 and crouched around 0.7% in 2015. Overall, the inflation rate appears to be creeping downward, but it has a long way to go before it falls back to recent norms.

How is inflation affecting seniors? Nearly 90% of seniors think the United States is experiencing a retirement savings crisis (According to an AAG study). While most Americans probably consider inflation in the short term when they go to the grocery store to buy food or fill up their vehicle with fuel, over time inflation can seriously devalue your savings and income. Understanding how inflation may hurt your retirement strategy is a must for ensuring that you have enough assets to last through your later years.

Let’s look at how retirees pay for expenses when they’re no longer working. While many seniors rely on Social Security, which will provide the majority of retiree income, they will likely need more income. Not all sources of income are the same, and some provide better protection against inflation compared to others. This leaves many seniors with a few choices: continue to work, sell off stocks, make extra withdrawals from retirement accounts, or use their largest asset – their home.

According to Shelley Giordano, the Chair of the Funding Longevity Task Force, a coalition of retirement and housing thought-leaders, “more retirees could benefit from accessing home equity strategically through the use of a reverse mortgage.” If you are 62 or older, own your home, and have paid off the mortgage or are close to paying it off, you’ll have accumulated equity in the property. This means you could do a reverse mortgage and tap into that home equity.

You also have options to purchase a new home with a reverse mortgage. There is a “Home Equity Conversion Mortgage (HECM) for Purchase” loan that allows people 62 and older to purchase a new principal residence with HECM loan proceeds. If you are in an area where housing prices are on the rise, you might be able to sell your home and move to an area that is less expensive. Or, for those who want to remain in their same town, a smaller home might help reduce expenses.

There are many uses for a reverse mortgage. Some include creating more cash flow for paying every day expenses, paying off high-interest credit card debt, more cash flow to invest in the retirement lifestyle you desire, investing in home improvements to make your home safer, and/or building a medical financial plan in case you need long-term healthcare. And we at Mortgage South want to help you see if a reverse mortgage can help you achieve retirement security. Mortgage South is local and you deal with a professional that has been doing these since their inception. Give Nathan a call, you will not be disappointed even if you find this is not a perfect fit, he can point you in a direction that might help. (423) 624-3878.

Your Home Could Be One Of Your Best Financial Planning Tools

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A sharp rise in home values, combined with a shortage of single-family homes and rising rent prices, has driven up home prices around the country, leaving senior homeowners with more than $11 trillion in home equity (according to kiplinger.com). If seniors are having trouble meeting expenses and want to downsize their housing costs, there are few options that are cheaper than their current housing situation.

If you’re planning to downsize or even stay in your home, you can tap that equity and take out a reverse mortgage line of credit. Some seniors are using these loans as a financial-planning tool, so they can leverage the equity in their homes on their own terms.

If you’re over 62 and have equity in your home, you can use a reverse mortgage to pay off your underlying primary mortgage using the equity built up in the property and then borrow a portion of the remaining equity — either as a monthly payment, lump sum or line of credit that will continue to grow over time, as long as you maintain an available balance. The amount you receive is based on the current interest rates, age of the youngest borrower, and the appraised value of the home combined with the lending limits set by HUD.

“You’re not giving up the house,” says Wade Pfau, the author of a book on reverse mortgages. “If you sell and pay off the loan balance, everything left over is yours. If the loan value exceeds the sale price, you’re not on the hook to pay back more.”

And we at Mortgage South want to help you see if a reverse mortgage can help you achieve retirement security. “If you have parents that are aging and worrying about bills and making ends meet, you need to sit down with Nathan and discuss the reverse mortgage options. This may be a perfect fit for you and your parents. Mortgage South is local and you deal with a professional that has been doing these since their inception. Give Nathan a call… You will not be disappointed even if you find this is not a perfect fit, he can point you in a direction that might help,” said client Rita Trammel. Call Nathan today to see how a reverse mortgage can help fill in the gap of retirement shortfall while property values are still high. (423) 624-3878.

2021- A Prestigious Year for Mortgage South

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2021 has been a busy and exciting year for Mortgage South. At the beginning of this year, we revealed our new slogan- Local. Trusted. Committed. These three words are the foundation of our business and we highlight the importance of our new slogan. In 1993 Mortgage South Worked with the state legislature to bring the federally insured reverse mortgage or “HECM” loan to the state of Tennessee. Once approved, Mortgage south completed the very first Reverse mortgage loan. Over the last twenty-eight years. Mortgage South has helped over 2,000 individuals and families in Tennessee and Georgia. Obtain financial security during their retirement. By leveraging the beneficial terms and attributes of a reverse mortgage. Locally owned and operated, we pride ourselves on the reliability and accuracy of our loans. Mortgage South is also the leading originator of reverse mortgages in Tennessee. Mortgage South consistently ranks in the top of independent reverse mortgage producers in the state of Tennessee.

In April of 2021, Mortgage South was nominated for a Better Business Bureau Torch Award. According to the BBB, “The BBB Torch Awards for Marketplace Ethics was established to further BBB’s mission of advancing trust by recognizing businesses for the commitment made to build trust with their customers through exceptional business practices that can help provide an example for other businesses to emulate. The nominations for BBB Torch Awards for Marketplace Ethics recognize businesses with leadership committed to ethical business practices, how these leaders communicate the vision to their stakeholders, the processes used to reinforce adherence to ethics in the development of business processes, management of staff, and the engagement of the business within our community. The businesses nominated all have strong marketplace track records and agree to undergo a comprehensive review of their business processes.” We were honored to be nominated for this award because this meant our clients believed we are an exceptional company, whom they can place their trust in.

In August of this year, we won the Torch Award for Marketplace Ethics in Category I (1-10 employees). We are incredibly proud of our small business and incredibly thankful for the support of our community. The expectation at Mortgage South. Is to deliver an exceptional customer experience that builds trust and loyalty, positively impacting the lives and communities we serve. In its communications of ethical practices, Mortgage South always has the customers best interests in mind Our objective is to exceed our customers’ expectations. We are continuing to work hard in our neighborhoods to build valuable relationships with our customers and provide financial peace of mind.

Mortgage South on Let’s Chatt

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Last month, our president Nathan Guerrero had the opportunity to be on Let’s Chatt and talk more about the reverse mortgage industry. Watch our interviews to find out more about our clients, the common misconceptions from clients, and how clients use the reverse mortgage loan to benefit their lives.

Watch the episodes here:

Financial Literacy Month

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April is Financial Literacy Month. Why is this important? Financial literacy is key to understanding how to save, earn, borrow, invest, and protect your money wisely. It is also essential to developing short- and long-term financial habits and skills that lead to greater financial well-being. Simply put, financial literacy is not just about the money you are spending, it is about the smart choices you are making every day and having a planning-forward focus.

The most important part of Financial Literacy is having a plan. It can be overwhelming to learn all the “financial jargon” when it comes to managing your money. The most important part is to make a plan about your finances. Look at expenses that will continue after retirement and what will be reduced after retirement.

Track what you spend and how it makes you feel, so you can decide what’s worth it to you and what’s not. Shift your spending toward what makes you truly happy – slaying debt, savoring a treat, helping a friend, or investing in an experience.

Focus on what you can control. Unfortunately, there are a lot of things that are out of your control when it comes to money. For example, you cannot control how the markets perform, a pandemic, or even how long recessions last. However, there are things you can control. For example, you can control things such as the amount of your monthly contributions, your spending habits, the investment and account management fees you are paying, and even the type(s) of insurance you have in place to protect your family and your financial security.

Start with small, manageable changes and celebrate milestones along your journey! When considering how your money can help you meet your physical, social, and emotional needs, break goals into bite-sized pieces which are easier to form into habits.

Consider using your home equity. At Mortgage South, we are committed to helping you find the best solution for your financial needs. When it comes to making decisions about your retirement goals and objectives, we want to show you how you can make the equity in your home work for your retirement needs.