Why Home Equity is Your Strongest Weapon Against the Economy
Most of us feel stress about our finances. At the top of our concerns? We believe that we will run out of savings in retirement. In fact, the majority of Americans feel this worry. According to the latest findings from Northwestern Mutual’s 2016 Planning & Progress Study, one in three people say the likelihood of outliving their savings in retirement is 51% or better.
To add insult to injury, recent news about Social Security increases and Medicare cost hikes may exacerbate the problem.
Social Security Flattens
The future of the Social Security program in our country has been a hot topic lately.
What we do know right now is that the increase in Social Security benefits for the coming year are minuscule. According to the Social Security Administration, monthly Social Security and Supplemental Security Income (SSI) benefits for more than 65 million Americans will increase 0.3 percent in 2017.
Last year the increase was 0.7 percent.
Medicare Cost Increases
The news is slightly better on Medicare for 2017. Premiums for Medicare Part B will rise by a modest amount in the new year.
The average premium for Part B, which covers physician services, outpatient hospital services and medical equipment, will rise to approximately $109.00 for most retirees, according to an announcement from the Centers for Medicare & Medicaid Services.
What Can You Do to Protect Your Quality of Life?
While the news is concerning and it might feel overwhelming, you do have options.
- Cut expenses where possible.
- Minimize debt.
- Consider work.
- Compare different Supplemental Medicare plans to help reduce costs.
- If you are a homeowner, consider ways to use your home equity for retirement expenses.
Why Home Equity is Your Strongest Weapon Against the Economy
Americans over the age of 60 hold 52% of all home equity in the country, according to a report by the Urban Institute.
Buying a home has always been one of the most powerful ways to save money. You were smart to buy and every time you made a mortgage payment, you were increasing your economic well being.
Now may be the time to cash in on that good decision making.
You can use your home equity by downsizing into a less expensive home or, if you wish to stay in your home as you age and are over 62, a reverse mortgage could be a viable option to increase your cash flow and eliminate your monthly mortgage payment.
Who Qualifies for a Reverse Mortgage?
Reverse mortgages offer homeowners a way to stay in their own homes while opening up access to some of your home equity. Your loan amount is determined by your age, current interest rates and the value of your home. The amount of cash available to you also depends on the amount you owe on a traditional mortgage — if anything. (Any outstanding debts against the home, including an existing mortgage, are paid off with the reverse mortgage proceeds.)
By taking out a reverse mortgage you can safeguard against changes in the Social Security and Medicare programs, or can increase your monthly cash flow by supplementing what you do receive in Social Security benefits.
What Are the Pros and Cons of Reverse Mortgages
Like all life decisions, there are pros and cons to getting a reverse mortgage.
Downsides of the loan include:
Potentially reducing what you leave to heirs: Many retirees would like to leave their home to their heirs. When you get a reverse mortgage, you can still do that, but the value of what you leave behind may be reduced.
The loan’s impact on your estate will depend on a variety of factors, including how much of the equity you spend. And, surveys have indicated that families would rather aging parents be comfortable now rather than leave behind money.
Closing costs: Closing costs on a reverse mortgage are sometimes slightly higher than those paid for a traditional mortgage. However, if you intend to stay in your home for at least another five years or longer, these costs (which are paid out of the loan itself) are minimal compared to the benefits.
Qualification is more difficult now: You must undergo a counseling session to secure a reverse mortgage as well as a financial assessment to determine whether or not the loan is a good fit for your future.
The good news is that talking with a lender and going through the counseling process is a great way to help you figure out if the loan is right for you or not. Want a preview: take this reverse mortgage suitability quiz.
There are however, many real advantages to these loans. Reasons to consider a reverse mortgages include:
Elimination of mortgage payments: If you are still paying down your mortgage, just imagine how much stress will be eliminated by your life when these payments go away. A reverse mortgage pays off your existing mortgage — dramatically improving your cash flow.
Flexible access to money: In most cases, reverse mortgage borrowers gain access to cash or a line of credit.
You can decide how to take the money and when. Best of all, you get total control over how it is spent.
Stay in your home: Reverse mortgages enable you can eliminate your traditional mortgage payments and/or access your home equity while still owning and living in your home. Given the right set of circumstances, a reverse mortgage can be an ideal way to increase your spending power and financial security in retirement.
Furthermore, the loans are flexible, have a low risk of default and are tax free.
Test Drive Using Home Equity as Part of Your Retirement Plan
The NewRetirement retirement calculator is a very powerful tool. It enables you to model all kinds of different retirement scenarios so that you can see what works for you.
The system even enables you to see what happens to both your retirement finances as well as your estate if you tap home equity.
- Try out downsizing. What impact does releasing maybe $100,000 in home equity and reducing your monthly expenses have on your plans?
- How does that compare to getting a reverse mortgage?
Forbes magazine called it a “new approach to retirement planning”.