How seniors can tap their home’s equity in tough times

There are three important points seniors should consider before extracting home equity.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | March 13, 2023

Article originally posted in Orange County Register on March 10, 2023.

Last weekend my childhood best friend died at 62. Partly due to poor health, he became financially challenged later in life.

Thank God, he had a stash of cash. His Orange County home was free and clear, completely paid for.

His home equity could have been put to good use. Basic living expenses, badly needed home repairs, and occasionally, a nice dinner out.

My best friend was of his own mind. Somehow, some way, he had a mental block about tapping into his home equity. Or, maybe he was fine as he was.

U.S. life expectancy is 76.1 years, according to the National Center for Health Statistics.

Are you on the financial edge? Are you going to outlive your money? Then what?

Over the years, I’ve received countless calls from struggling seniors. But never-the-less, they are the fortunate ones having that motherlode of assets — a home. Many contemplate downsizing. That tends to be distasteful, most say.

So, what are their options to extract equity?

Every senior’s situation is unique. There are three important points you must consider before thinking about the possibility of extracting home equity.

First, lenders cannot deny you a mortgage or discriminate against you because of your age. It doesn’t matter if you are 90 years old and you are taking out, say, a new 30-year mortgage. If you die before the mortgage is paid off (because you didn’t quite live until age 120), your heirs can assume the existing mortgage.

Secondly, before going to a financial counselor, mortgage person or even a real estate agent, get the person you trust the most in life to offer you nonjudgmental emotional support. You should not feel embarrassed or ashamed. The older you get, the easier it is to be tricked, pressured and swayed by a salesperson. You need someone in your own corner who doesn’t have a dog in the fight.

Also, do you have other assets you can tap in addition to home equity? Do you have parents, siblings, children or someone else who can financially assist you? If so, ask them to consider helping you.

There also are loan programs to consider.

Perhaps the most contemplated mortgage program for seniors (age 62 and over) is the HECM or home equity conversion mortgage, and the so-called reverse mortgage.

The big idea is to be able to tap into your home equity without having to ever make another house payment. You can stay in the house until you die.

“You, nor your heirs, will never owe more than your home is worth, no matter how long you live,” says Joey Sather, a mortgage loan originator at Mutual of Omaha Reverse Mortgage.

Note: Your heirs have up to one year after your death to pay off the reverse mortgage (usually by selling the property). If the negatively amortizing mortgage built up to say $800,000 (because you long outlived the actuary table prediction) but the home sold for $700,000, your estate would owe the mortgage lender 95% of the $700,000 property value or $665,000.

HUD allows a 5% haircut to cover sales transaction costs (real estate agent commissions, escrow, title, etc.). HUD makes up the $135,000 difference ($800,000 minus $665,000) to the reverse mortgage lender, according to Sather.

The downside of a reverse mortgage is this current rising interest rate environment works against you as HUD uses predictive modeling to estimate your life expectancy and maximum loan amount.

Reverse mortgages are negatively amortized based on the funded loan amount. The higher the note rate, the faster the loan balance builds up, and fewer funds are available.

Here are two examples, according to a loan-to-value chart provided to me by reverse mortgage lender Longbridge Financial LLC.

A 75-year-old could extract as much as 56.8% of their home’s value based on an expected 6.245% interest rate (as of Oct. 28, 2022). Compare that with 50.1% of potential equity pullout on a 4.875% rate (as of Aug. 9, 2022). Assuming a property value of $700,000, you’d be looking at a maximum loan amount of $350,700 compared with a max of $397,600 when the expected rate was much lower at 4.875%.

You can also get an equity line-of-credit component as part of an adjustable-rate reverse mortgage whereas the remaining unused line of credit grows larger — for your benefit — as time goes on.

Fog-the-mirror may be a good alternative, or a better choice compared to a reverse mortgage. So long as you have good credit there are no other qualifying terms. The job and income sections of the loan application are left blank. You can cash out up to 70%, recognizing property values up to $5 million. We’re talking loan amounts up to $3.5 million.

The FHA reverse mortgage recognizes property values up to $1,089,300 and not a penny more, no matter what the true home value is.

The downsides are you have a monthly payment and the cash-out rate is 9% to 9.25% on a 30-year fixed. You could take the cash-out and put it into a high payment CD, say at 4% to 5% to offset some of the foggier interest expenses.

The most affordable amortizing mortgage would likely be a conventional Fannie Mae or Freddie Mac 30-year fixed rate, cash-out mortgage. Today, you’ll be looking at a rate of around 6.5% for cash-out. You are allowed up to 80% (of the property value) to cash out. You do have to qualify.

The most interesting, least-known mortgage is a relative of the Fannie mortgage, and it’s called a parent loan. It’s for children wanting to provide housing for their parents. If the parent or parents are unable to work or do not have sufficient income to qualify for a mortgage on their own, the child is considered the owner/occupant. The same rules apply. Cash-out to 80% loan-to-value.

Other notable mentions are interest-only mortgages, mainly home equity lines of credit. You can usually get them without any costs associated. You’ll pay interest-only, but buyer beware, the rates suck.

The prime rate is currently 7.75%, and it’s likely to go to 8.25% next week after the Federal Reserve raises rates. Just about every HELOC is pegged to the prime rate. That is a good tool if you have a low first mortgage you don’t want to touch.

If you are elderly, in need and have home equity, there are plenty of ways you may be able to get there. You worked your whole life to accumulate financial assets. Tap your home equity if need be. You can’t take it with you.

Freddie Mac rate news: The 30-year fixed rate averaged 6.73%, 8 basis points higher than last week. The 15-year fixed rate averaged 5.95%, 6 basis points higher than last week.

The Mortgage Bankers Association reported a 7.4% mortgage application increase from last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,295 less than this week’s payment of $4,700.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6%, a 15-year conventional at 5.875%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 6.375% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.99% and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year VA fixed rate at 5.5% with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.