Unfortunately, some grandparents are put in the very difficult position of raising their grandchildren. There are various reasons as to why this is the case. One thing is for sure, this reality transcends socioeconomic lines. Let’s take a look at a way that I recently helped a pair of grandparents that found themselves in this precarious situation. For the purpose of this blog, I will call our client’s the Martins. The Martins became guardians of their granddaughters two years ago. The oldest age 16 and the youngest age 13. Mr. Martin age 68 and Mrs. Martin age 67 were not anticipating that they would need to raise children during retirement. However, when they were called upon, they stepped up to the plate and I commend them for that. Here is how the Martin’s were set up for retirement. The Martin’s receive $4,200 a month in combined social security benefits. They had paid for their home along with all other debt. They fully paid for an automobile that would hopefully see them through the majority of their retirement and had around $50,000 in cash savings. They also had saved $275,000 in their pre-taxed retirement accounts. This allowed them to live a reasonable lifestyle. Their goal was to live within their
means and use the $50,000 in cash savings for larger unforeseen expenses. They wanted to leave their IRA intact without withdrawals for as long as possible so that it could continue to grow until they began taking their required minimum distributions. Needless to say, their plans had to be recalibrated once they became the guardians of their granddaughters.

The average cost of raising a child according to the Institute of Family Studies is a whopping $1,438 dollars a month! So, its not surprising that over the last two years the Martins have spent down $35,000 of their cash reserves. Once they realized that the rate at which they are spending is unsustainable, The Martins started exploring solutions for their dilemma. First, they looked at a traditional cash out refinance of their home. Then they explored a traditional home equity line of credit. They quickly understood that obtaining more debt in the traditional manner was not the solution that would work for them. They needed additional cashflow plain and simple. This is where Mortgage South of Tennessee was able to provide a solution that fit their situation.

The Martins called me and gave me a brief synopsis of their situation. They scheduled an appointment and I gathered some more detailed information from them. Once my analysis was complete, I provided a potential solution with a HECM (also known as the federally insured reverse mortgage). First, I wanted the HECM to provide much needed positive cash flow to the situation so, I created a monthly distribution to them of $2,000 a month for a specific period of time. In their case, I proposed 5 years because the youngest granddaughter would be 18 at that time. Next, I used the reverse mortgage to create additional emergency funds that would be there for the inevitable home repair, etc. This would give them the peace of mind that they still had $15,000 remaining in cash and another $95,000 in their new found HECM emergency fund. This reverse mortgage solution allowed the Martins to add $24,000
of positive nontaxable cashflow to their family budget until their youngest granddaughter reaches age 18. It also created a HECM line of credit of $95,000 for emergencies, and finally allowed them to keep their original plan in place of not tapping into their taxable IRA account until it was time to start taking their mandatory distributions from their qualified IRA. A federally insured HECM reverse mortgage will not provide the correct solution for every situation, but when it does, it is a game changer for retirees trying to navigate a world that has become increasingly more financially complicated.

 The news on the financial front for folks in retirement is both good and bad. Let’s have some good news first. Those retirees who have been fortunate enough to have owned a home and or have saved for their golden years, have in many cases experienced as much as a 40% increase in their real estate asset values.  Also, they can finally receive favorable interest rates on certificate of deposit accounts. I’ll give you an example. My mom is a retired schoolteacher. As a single mother, she raised my brother and I on modest pay. She never was able to save above what was taken out for social security and her state provided pension program. Fortunately, the state of Georgia currently provides a nice pension benefit, so she lives comfortably now and even saves money each month. She is in her late 70’s and lives alone and independently. A few health scares and the ever-present maintenance needs of her long-term residence caused her to recognize that it was time for a transition. So, with the help of my brother and I, she listed her home and sold it at the peak of the post covid real estate frenzy. She now rents a very affordable and nice single level cottage from longtime friends she had developed from her church.  Her rent is well below the national average for a property of this type, so after running the numbers, renting made a lot of sense for her situation. She cleared $240,000 from the sale of her home. After paying off her car and adding $20,000 to her cash reserves, she wanted to place the balance of her funds in interest bearing accounts. She has no investment experience, so her risk tolerance is very low. With the help of a financial advisor, we laddered her funds in FDIC insured CD’s. She will average 5.3% for 3 years from the start of the plan. My mother is ecstatic about a $30,000 gain over 3 years with no risk! It’s been well over a decade since anyone with savings could reap this type of benefit.

Now let’s face the bad news. Retires are faced with inflation and borrowing cost at a forty and twenty year high respectively. Social Security benefits have increased thanks to the cost-of-living adjustments of 5.9, 8.7 and 3.2% in the years 2021-2023.  The aggregate increase of 17.8%, while helpful, doesn’t fully offset the increased cost of the inflation ratchet. For this blog post, I will highlight the impact of inflation on transportation. According to Edmunds’ latest data, the share of 1,000+ monthly car payments has reached 17.5% in Q3 of 2023. That’s up from 17.1% in Q2 of 2023 and a massive increase from the meager 4.3% back in 2019. The average car payment in Q3 of 2023 reached a record high of $736 per month for new cars, up 4.5% since Q3 of 2022 and a 32% increase from 2019! Meanwhile, the average monthly car payment for used cars is $567 making a 46% rise from 2019! So, I believe it is apparent that an individual in retirement has a lot of trepidation when it comes to the prospects of purchasing the highest priced ticket items outside of a new home. Let’s not forget, this is just one sector of the economy that has seen massive increases in cost due to inflation.  Inherently retirees are on some type of fixed income. Whether it is a standalone social security benefit or a combination of social security and other savings. The number is finite. So, this leaves many of them and the people that advise them searching for ways to offset inflation in order to maintain the standard of living and essential services that they have grown accustomed to. One way to help alleviate this is by using the federally insured HECM, also known as the reverse mortgage loan as a solution. Let’s cover the process step by step. The first step is education. I sit down with my clients and ask a series of questions that help me understand how they are positioned financially. Then I will explain the ins and outs of the reverse mortgage loan. Once the program has been fully explained and all questions are answered, I ask my clients to express any concerns they have for their current and or future financial needs. The next step is catering a solution for their specific situation.

Now, let’s look at an example of how I helped a particular client utilize a HECM or reverse mortgage loan to purchase a new vehicle and provide additional resources for future retirement needs.  For this blog, I will call my client Henry.  Henry owned a small business here in Chattanooga, TN. He enjoyed his work until his early 70s. He had to close his business because the technology had changed dramatically, and it did not make sense for him to invest in updating the equipment needed to keep his business going. Henry had saved around$300,000 in his tax deferred IRA.  He also had a paid for home that is located in a very sought after area of Chattanooga. He called my office because he was interested in finding out how or if a HECM reverse mortgage could improve his current and future financial standing. During our initial conversation, Henry mentioned that his car was in good shape, but it lacked the safety features that he thought were important for him to have as he becomes an aging driver. He wanted to purchase a car with the features but didn’t want to increase his taxable withdrawals from his IRA to do so. So, I went to work for him and created an option that allowed him to tap his home equity in a unique way to accomplish his goals. His home appraised for $530,000. This allowed him to have a total of $230,000 in available reverse mortgage proceeds. Now the neat part of this is how funds were disbursed to him in a way that met his needs. First, I provided a monthly disbursement of $765.00 per month for 6 years. This provided funds to cover the purchase of a new car that provided him with all the safety options he desired and covered the increase in his auto insurance premium. Second, I provided a HECM or reverse mortgage line of credit of $181,000 that grows over time regardless of the fluctuations in housing values. All monthly disbursements and the line of credit are federally insured. So, Hennery can rest assured that his transportation and future retirement needs are now standing on solid ground.

In my line of work, I meet with clients that are either entering or are currently in retirement. One question that I ask married couples is, are you prepared for life after the loss of a spouse? Most of the time I get sort of a blank stare and then each spouse looks to one another for an answer. Needless to say, this strikes an uncomfortable chord with nearly all of them. I totally understand why this is the case. I myself have been married for close to two decades now to my lovely wife and business partner Candy. We have three great sons together and are constantly talking about what life will look like when we are able to take the next big adventure of our lives together “retirement”. We have taken care of the estate planning several years ago; however, that is just the technical part of it. I know there is more work to do in this arena from a financial planning perspective. Making sure both of our names are on all of the deeds to all of our major possessions, cars, etc. It’s just a very tough exercise and conversation because we just don’t want to think about it.

I have seen first hand how avoiding this subject can be devastating when a spouse is suddenly lost. Once the initial fog of grief has dissipated, two primary questions seem to come to mind for the surviving spouse. 1. Who am I as an individual, and what is now going to be my purpose for the rest of my life? 2. What is my financial position, and am I going to be able to maintain my standard of living for the balance of my retirement? I am not qualified to counsel with someone on the first question. However, the service that we provide can make a big and positive impact on an individual’s financial security during retirement.  Our company Mortgage South of Tennessee completed the very first federally insured HECM also known as the reverse mortgage in 1993. Since then, we have advised our clients on how to strategically deploy their home equity during retirement in order to shore up their financial position.

I am going to give two scenarios that illustrate how we have helped our clients maximize all of their available assets during retirement in order to shore up their financial positions. In the first scenario, John age 70 and Sara age 68 are referred to me by their financial advisor. Their home valued at $400k is paid for and they have a total retirement savings of $500k. Of these savings, $75k is cash or cash equivariant accounts. The other $425k are in qualified retirement accounts. “Qualified” retirement accounts are typically the employee sponsored retirement accounts that have been transferred into individual accounts after retirement. When an individual withdraws funds from these accounts, a taxable event takes place. So, if someone who has a $425k qualified IRA and they are in a 22% tax bracket they effectively have $331,500 after taxes are accounted for. John and Sara have a combined income of $6,500 a month. This is comprised of John’s social security benefit of $2,800, Sara’s social security benefit of $2,100 plus Sara’s $1,600 pension benefit. John and Sara have had a conversation with their financial about the” what if” scenario of one of them passing prior to the other. Their advisor explained to them that when people are married and one spouse passes, only the larger of the two social security checks will be available for the surviving spouse. They also reviewed Sara’s retirement separation paperwork and now understand that the surviving spouse would receive half of her current benefit. So, in John and Sara’s case, John’s monthly income would be $3,400 should Sara pre decease him. Sara’s monthly income would be $4,400 should John Pre decease her.

This did not sit well with John, Sara or their advisor, so they began to think of possible options to hedge against such a significant loss to their monthly cashflow in the event of the loss of a spouse. That’s were Mortgage South and the federally insured HECM or Reverse Mortgage comes into play. I sat down with John and Sara and completed a needs analysis. After completion, I proposed that they deploy the HECM stand by line of credit strategy. Now let me explain how that works. Based upon Sara’s age of 68, because she is the youngest spouse, the appraised value of $400k and the current expected interest rate of 6.380%, John and Sara would have a HECM “Reverse Mortgage” line of credit with an availability of $137,059. Next is the cool part and in my option the best kept secret about the FHA insured HECM loan. John and Sara’s HECM line of credit will not stay stagnant. Every month that they do not use their reverse mortgage line of credit, it grows and they have more access to additional funds! The stand by line of credit strategy would mean that John and Sara leave their HECM line of credit waiting in the wings until it is time to deploy it. Let’s say that in ten years John or Sara were to unfortunately pass away, their reverse mortgage line of credit that started out at $137,059 is now valued to the remaining spouse at $254,131 an increase of $117,072 or 46% from its original starting point! John or Sara could now start a monthly distribution to themselves in order to replace the loss of income due to the passing of their spouse there by maintaining the standard of living that they have been accustomed to for the entirety of their retirement. Now, I’m sure that you may have detailed questions that you would like to ask. I highly encourage you to reach out to me for a one-on-one conversation. This strategy will not fit every couple in retirement; however, in my opinion, thousands of middle to upper middle income retirees should at least be educated on how home equity can or should fit into their retirement planning.

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!

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.    

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.”

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. “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.