Mortgages and Home Loans for Seniors
Seniors begin looking at their options concerning mortgages for a variety of reasons. Although they’ve invested a good part of their life in their current home, many come to realize that it’s time to make a change. For some, the physical strain of keeping up with the maintenance has become too much. For others, the bills and upkeep of a home are financially draining on their limited retirement budget. For others, the home may be located too far from family and friends, have stairs that are difficult to navigate, has more space than they need, or a yard they can no longer maintain.
Whatever reason you have, it’s smart to consider all your options and to be planning ahead for your financial future. The more you know, the better your chances of making good decisions that will lead to a secure and comfortable life, now and for many years to come.
House vs Home
When it comes to making real estate decisions, it’s important that older adults seriously consider their financial future and not let sentiment get in the way. However, that can be hard for many. It’s the home they shared with a spouse who may no longer be with them. It’s where they raised their children. Each room is filled with precious memories.
One of the biggest mistakes seniors make is staying in their home longer than they should. The longer a person remains in a house that is unsuited to their current needs, the more draining it becomes – financially, physically and mentally.
If you’re having difficulty separating your emotions from the home, look at it as an investment instead. Look at it as the house you can use for your benefit, not the home you just can’t separate yourself from. For example, a senior has lived in their home for more than 30 years. The home is now paid off and worth substantially more than they paid for it. They can sell their home that is now too big and difficult to maintain for, let’s say, $500,000. With the money from that sale, they can now purchase a more manageable home for $200,000 and invest the remaining capital. They benefit by moving into a home that better serves their needs, by paying lower utilities and property taxes and by earning income on the money they invested.
Many benefits can be derived from moving into a smaller home. As seniors get older, larger homes become more difficult to maintain and can pose navigational problems since many larger homes contain stairs. Downsizing to a more manageable home enables seniors to maintain long-term independence while still enjoying the benefits of home ownership.
Downsizing provides benefits which include:
- A smaller home is easier to keep clean
- Less maintenance
- Smaller utility bills and property taxes
Downsizing provides opportunities as well. You can:
- Move to a golf course community if you like to play golf
- Purchase a zero-lot-line home
- Move to another part of the country where the weather is warmer
- Move closer to family and friends
- Move to a location that is closer to stores and other amenities and conveniences
Don’t wait until you find yourself in a desperate situation to downsize. The earlier a senior makes the decision to downsize the better. You can plan for a future in your new home knowing it’s the right size for you to grow old in. Downsizing frees up capital for investment. And, you’ll have peace of mind knowing you’re making this important decision while your mind is clear and sharp.
Downsizing can be a hassle; therefore, consider using the services of a senior move manager. They specialize in helping older adults through the process of downsizing and moving to a new home. They work with you and your family throughout the whole process, from start to finish.
New Mortgages for Seniors
If you want to purchase a new home – whether downsizing to a smaller home or upgrading to your dream home – you need to consider a few items and to take a few precautions. Additionally, you may have a few questions for which you need answers concerning financing and some concern about the practicality of taking on long-term debt at this time in your life. Let’s see if we can address them here.
Key Points Concerning New Mortgages for Seniors
Since many older adults are retired and no longer collect a “salary,” they need to look at the mortgage process a little differently than they did earlier in life. Seniors need to consider these key points as they move forward:
- When determining your qualification standards, lenders consider your debt-to-income ratio the most important factor
- A retiree’s income is determined by assets such as individual retirement accounts (IRAs), 401Ks and other investments
- To prevent predatory lending practices, be sure to have all loan documents reviewed by a professional such as a lawyer, financial planner or trusted real estate professional
- Create a budget that includes contingency expenses
Income and Mortgages for Seniors
When considering the purchase of a home, your income is vitally important. If you’re retired and rely solely on a fixed income, it’s only natural to be concerned about taking on a new mortgage. After all, benefits such as a pension, Social Security, or an IRA (individual retirement account) generally don’t equal what you earned when working a full-time job.
But, with times as they are, many more older adults have mortgages or are taking on new mortgages than ever before. A 2013 Federal Reserve study indicated that 42% of households headed by persons who were between the ages of 65 and 74 had home-secured debt – up from 32% in 2004 and 18.5 % in 1992.
Fannie Mae and Freddie Mac, United States government-sponsored enterprises, work to assist older adults who have cash to obtain loans – even those with less than perfect debt-to-income ratios. They do this by taking retirement savings into consideration. Specific formulas to calculate housing-expense ratios and debt-to-income ratios using your retirement income are utilized to determine whether you qualify for a mortgage.
But, there are risks to having debt, especially debt on secured loans (such as mortgages). If you become delinquent in your payments, you can lose your home.
Older adults who are 59 years 6 months of age or older and who are eligible for penalty-free withdrawals from retirement plans can take advantage of drawdowns – a gradual accessing of these funds. The monthly, quarterly or yearly distributions you receive from your retirement accounts are counted as income. The money that remains from your distributions after you pay taxes can be used at your discretion.
Additionally, liquid assets such as savings, mutual funds, money-market accounts, bonds and stocks can be used towards qualification for a loan; however, some lenders may only use 70-80% of these assets, determining the rest to be ineligible. When liquid assets are used, the eligible assets are divided by the number of payments on the new mortgage. On a 15-year mortgage, you’ll have 180 monthly payments; and, on a 30-year mortgage, 360 monthly payments.
As you approach your retirement years or after you have already entered them, there are other points you need to consider before obtaining a mortgage:
Equity: If you’re selling one home to get another, especially when down-sizing, you may have a large amount of equity at your disposal to increase your purchasing power.
Budget: It’s important that you know where your money is going and how much mortgage you can afford before you speak with a mortgage lender. This budget should include emergency expenses such as medical care. It should also plan for things such as increases in health-insurance and property taxes.
Mortgage Length: Shorter may be better. If you were to pass away before the home is paid off, would your heirs be able to keep the home if your estate proceeds don’t cover the loan? If this is an important consideration, a shorter loan term may be more appealing – a 10- or 15-year note, rather than the standard 30-year note. The payments on the shorter loan will be higher, but it is more likely to be paid off at the time of your death.
Age: Although your age may weigh heavy on your mind as you consider a mortgage, if you meet the qualification standards, age cannot be a disqualifying factor. The Equal Opportunity Credit Act prohibits discrimination for many reasons, including age.
Exercise Caution: Predatory lenders often target seniors. Certain practices qualify as “predatory.” These may include:
- Large prepayment penalties
- Inflated fees
- False disclosure of loan terms and costs
- Negative amortization – loan payments that don’t cover interest
Many of these practices are addressed in the Truth in Lending Act; however, it’s prudent and wise to have a financial planner, a lawyer or trusted real estate professional review all loan documents before signing anything.
Mortgages During Retirement
More and more seniors have mortgages and are taking out new ones. In a survey taken by a national mortgage banker, American Financing, 44% of Americans between the ages of 60 and 70 have a mortgage when they retire. And, as many as 17% believe they will never pay off their mortgage. If you’ll be paying for a mortgage after retirement, make plans now to keep it manageable while on a fixed income.
Refinancing Your Mortgage
Many older adults worry about making mortgage payments while on a fixed income. One solution to this dilemma is to refinance. This is especially important if you have an adjustable rate mortgage. Refinancing to a fixed rate will make your mortgage payment predictable and generally lower – both great for those on a fixed income.
When refinancing, you may be able to get a lower rate. Or, you can refinance for a longer term, spreading the payments out. The benefits include lower monthly payments. Drawbacks include more finance charges in the long run and payments for longer than you would have had you kept the original terms with the original loan. This is another decision that should be discussed with a financial advisor if you have any questions or concerns.
If you have the financial resources, another option is to purchase an annuity that will produce regular payments to cover your mortgage. You can do this by rolling your retirement accounts (401K and IRAs) into an annuity that lasts as long as your mortgage term, thereby, avoiding a large tax bill. Annuities can be tricky, however; therefore, it’s prudent to discuss your options with a financial advisor.
Paying Off Mortgage with Retirement Funds
You may have savings or retirement funds and wonder whether you should use it to pay off your mortgage. For many, it doesn’t make sense because of the taxes and possible early withdrawal penalties. But, if your savings and investment accounts are earning less than your mortgage payment, it might make sense to pay off some, if not all, of your mortgage. Talk to a financial planner to determine your best-case scenario.
Mortgages and Tax Deductions
Another thing to consider … mortgage payments are usually tax deductible. Talk to your accountant or financial planner to see if it’s wise to keep paying the mortgage payment for its tax advantages.
Mortgages Available to Seniors
Whether you are downsizing, refinancing or purchasing a second home, there’s a chance you’ll need a mortgage. There are several types of mortgage loans available to seniors. These include:
- Standard Mortgage: A traditional mortgage that lasts between 5 to 30 years. Qualification is determined by your credit rating and your income.
- Second Mortgage: A second mortgage is taken out in conjunction with a primary mortgage and is the smallest of the two. Second mortgages, which are riskier for the lender, often have an interest rate that is higher than the traditional mortgage.
- Refinanced Mortgage: In a refinanced mortgage, three things can occur. You can change the type of loan, the rate or the length of the loan.
- HECM (Home Equity Conversion Mortgage): A HECM is like a reverse mortgage except it is regulated by the Federal Housing Authority. The fees and costs are typically worked into the loan.
- HELOC (Home Equity Line of Credit): Similar to a credit card, you can take out small sums against the equity of your home. At first, you only pay interest on the loan. A HELOC is often used for repairs and renovations.
- VA Loan: A VA loan, available to veterans and their spouses, has great rates and requires little to no down payment. The loan is guaranteed by the Department of Veterans Affairs.
- Reverse Mortgage: Available to seniors who are 62 or older, in a reverse mortgage, the lender pays the homeowner a certain portion of the home’s equity. At the end of the term, the bank owns the home. Reverse mortgages can be a type of HECM.
Reverse mortgages are available to people who are 62 or older and own their own home. In a reverse mortgage, you convert part of the equity in your home to cash. Rather than continuing to pay the lender a mortgage payment every month, in a reverse mortgage, the lender pays you funds against a portion of the equity. You are not required to sell the home or pay any additional funds against any remaining balance if one exists.
The money received from a reverse mortgage is generally tax-free. Generally, you’re not required to pay the money back as long as you live in the home; however, when you move out, sell your home or die, you (or your spouse or heirs) would be required to repay the loan. This may mean the home has to be sold to access the funds needed to accomplish this.
Reverse mortgages have evolved over the years and certainly are not a “one size fits all” type of loan. When used properly by someone who fully understands what they are doing, a reverse mortgage can be a lifesaver. As property taxes and insurance cost increase and Social Security stagnates, a reverse mortgage offers options to someone on a fixed income.
Types of Reverse Mortgages
There are three types of reverse mortgages.
Single-Purpose Reverse Mortgages are the least expensive option. They are offered by some local and state government agencies, as well as non-profits; however, they aren’t available everywhere. In a single-purpose reverse mortgage, the lender specifies the purpose of the loan – home repairs, improvements or property taxes. The money can only be used for what the lender dictates. Low to moderate income homeowners generally qualify for these loans.
Proprietary Reverse Mortgages are private loans backed by the companies that develop them. Homeowners with higher-valued homes and smaller original mortgages qualify for more funds. Proprietary reverse mortgages give you one lump sum of money at the time of closing.
Federally-Insured Reverse Mortgages (HECM) are federally-insured reverse mortgages backed by the US Department of Housing and Urban Development that can be used for any purpose. A HECM loan allows you to choose from several different payment options including taking a large single payment, a fixed monthly cash advance for a specific time period, a line of credit that you can draw upon when you choose until the line of credit is expended or a combination of monthly payments and a line of credit.
The HECM for Purchase is designed to help seniors purchase a new home better suited to their needs, while simultaneously obtaining a reverse mortgage. This loan incurs only one set of closing costs.
In a reverse mortgage, you:
- Borrow against the equity of your home
- Get an advance on part of the home’s equity
- Keep the title to the home
- No longer have to make a mortgage payment even if there was a balance on the loan used to purchase the home
- Usually don’t pay taxes on the money received, and it generally doesn’t affect Medicare or Social Security benefits
- Are still responsible for maintaining the property
When the borrower(s) die, sells the home or no longer uses it as a primary residence, the loan has to be repaid. In certain circumstances, a non-borrowing spouse may remain in the home; however, they would no longer receive payments since they were not part of the loan agreement.
Things to consider concerning reverse mortgages:
- Lenders typically charge an origination fee and other closing costs at the time of the reverse mortgage agreement.
- For federally-insured HECMs, lenders may charge mortgage insurance premiums.
- Proprietary reverse mortgages and HECMs may be more expensive than a traditional loan, and, the upfront costs are high.
- Lenders typically charge servicing fees over the life of the reverse mortgage.
- As you receive money through the reverse mortgage, interest is accruing on the balance each month, causing the amount owed to increase over time.
- Most reverse mortgages have variable rates. Some, such as HECMs, offer fixed rates. Fixed rate loans typically give you one lump sum at closing and generally pay out less than you would get with a variable rate loan.
- Because you keep the title, you are still responsible for things such as insurance, property taxes, utilities and upkeep of the home.
- If you don’t maintain the home, pay the property taxes or carry homeowner’s insurance, the lender may call the loan.
- Interest paid on the reverse mortgage isn’t tax deductible.
- Most reverse mortgages have a non-recourse clause which says you (or your estate) will not owe more than the value of the home. And, if given the opportunity to pay off the loan, you won’t have to pay more than the appraised value of the home.
Reverse mortgages can be tricky and may not be right for you; therefore, it’s advisable to consult an independent government-approved housing counselor to make sure a reverse mortgage is the right answer for you. A reverse mortgage ties up the equity in your home and may not be available to your heirs when you die. Before deciding to do a reverse mortgage, look at the different types of reverse mortgages and comparison shop lenders.
Reverse Mortgages and Protecting Yourself
Be wary of lenders who act like a reverse mortgage is the solution to all your problems, have ideas on how you can spend the money (possible scam) or pushes you to take out a loan. Only you can determine if a reverse mortgage is right for you. If you have questions, seek the advice of a counselor.
If you are being pressured to complete the deal or don’t understand the features or cost of a reverse mortgage, don’t do it. Take time to speak with a counselor, do some research and find a company you are comfortable doing business with.
Tips to protect yourself include:
- If it sounds too good to be true … it probably is
- If you are being rushed, they’re probably trying to slip something past you or trying to get away with something
- Before you sign anything, contact a lawyer to make sure you understand the loan document
- Have a market analysis done
- Get a second opinion
- Determine the value of your home
Here are a few resources you may find helpful as you consider your options.
- AARP offers a suite of web-based money tools to help with your finances and retirement planning.
- HUD-sponsored housing counseling agencies can provide advice about buying a home and answer your questions about reverse mortgages.
- The Housing and Urban Development Information for Seniors website offers information and links for information about senior housing and reverse mortgages.
- USA.gov site offers links to various government sites concerning housing for seniors.
- The National Senior Citizens Law Center is a non-profit organization who works to protect the rights of low-income seniors.
As you go through this journey, if you suspect someone is trying to scam you or that someone involved in your transaction is breaking the law, let the lender, counselor, or loan officer know. Then, file a complaint with the Federal Trade Commission, your state banking regulatory agency or your state Attorney General’s office.
As you consider your mortgage options and plan for your future, remember the following.
- If you own a home that’s too large for your needs, downsize to take advantage of the benefits. Not only will it make your life easier, but it will also give you some capital to invest in your future.
- If you are retired and have a mortgage, consider a refinance or find another payment strategy to make the payments more affordable.
- If you determine that a reverse mortgage will best serve your needs, it’s prudent to have a financial planner, a lawyer or a trusted real estate professional review all loan documents before signing anything.
- Use the money wisely.
The decisions you make now concerning your mortgage and your home will have lasting effects on you and those close to you. Your home can be one of your greatest financial assets or one of your greatest burdens. By taking steps now to manage your investments, you’ll be able to maintain your independence for many years to come.