House Rich and Cash Poor: Ways to Unlock Your Home s Value Avenidas Housing Conference, March 10, 2012 Barbara Krimsky Binder, CFP, BKB Financial Advisors Does This Describe Your Situation? - You bought your home years ago - Your home has appreciated a lot since then - Your property taxes are very low - Your home is now your largest financial asset - You (may) suddenly have higher expenses o Perhaps for long-term care for yourself or spouse - You are using your investments to cover expenses - You are concerned about running out of money Agenda - Key Questions - Reverse Mortgage - Home Equity Line of Credit - Other Ways to Unlock Your Home Equity - Related Tax and Estate Planning Topics Disclaimer: This presentation is for educational purposes only and not to be interpreted as a comprehensive overview of the topics covered. Please discuss the specifics of your situation with a financial professional.
2 Key Questions - Do you have a short-term or a long-term need for extra funds? - Do you have the ability to make monthly payments? - If you currently have a mortgage, o How much is your balance? o Would it help if you could defer the monthly payments? - What is your monthly income from all sources, including Social Security, Pensions, IRA Distributions, Annuity Payments, Dividends/Interest? Traditional Ways to Unlock Your Equity if you want to Stay in Your Home - Reverse Mortgage HECM = Home Equity Conversion Mortgage, insured by FHA - Home Equity Line of Credit ( HELOC ) Must have sufficient income to quality Reverse Mortgage Overview Available to Homeowners Age 62 or over Might be appropriate if - You can t or don t want to make monthly payments - You have a long-term need for extra funds The amount you can borrow depends on - Your Home s Value (capped at $625,500) less existing Mortgage Debt - Your Age (the older you are, the more you can borrow) - Current Interest Rates (the lower the rate, the more you can borrow) Borrower s obligations - Mandatory counseling to help you understand this product and your alternatives - Maintain the home in good repair - Pay property taxes and homeowners insurance
Reverse Mortgage - Advantages 3 - No monthly payments - The loan does not have to be paid back until the last borrower permanently moves from the home, sells the home, or dies - Non Recourse You or your heirs will never owe more than the home is worth - Flexible pay-out options - Fixed or Variable Interest Rate options Reverse Mortgage Disadvantages - Home value over $625,500 is ignored - If there is an existing mortgage, it must be paid off at closing - Reverse Mortgages are complex, confusing and details are often misunderstood - High Up Front Costs o Origination Fee (up to ~ $6000, sometimes negotiable) o Mortgage Insurance ($60 - $12,510) o Closing Costs (appraisal, title search, inspection, recording fees, etc.) - Interest and Fees accrue monthly, increasing loan balance over time o Interest Expense (Fixed or Adjustable, varies by lender) o Mortgage Insurance (1.25% annual rate) o Service Fee ($25-$35 per month, varies by lender) - Fixed rate interest option requires lump-sum payout option Reverse Mortgage - How Much Can You Borrow? Example: Market Value of House: > $625,500 Mortgage: $0 Age of Youngest Borrower: 80 Monthly Income: Not Applicable Credit Score: Not Applicable Interest Rate (varies by lender): 2.49% adjustable, 5.06% fixed Payout Option Amount Interest Rate Options Lump Sum ~ $400,000 Fixed or Adjustable Rate Line of Credit ~ $400,000 Adjustable Rate (only option) Monthly Payment: ~ $2,800 Adjustable Rate (only option) Reverse Mortgage - A few words of caution - Be wary of overly aggressive sales people - Don t use a Reverse Mortgage to buy an annuity or insurance - Seek a second opinion from a trusted independent advisor - Once you understand this complex product, shop around for the best rates - Consider other options before making your final decision
Home Equity Line of Credit Overview - Available to Homeowners of any age - Low Up Front Costs - Might be appropriate if o You have the ability to make the monthly payments o You have a short-term need for extra funds - The amount you can borrow (and the cost) depends on o Your income (this is most likely the major determinant of size of credit line) o Your Home Equity (defined as Market Value minus Outstanding Mortgages) o Current Interest Rates o Your Credit Score 4 Home Equity Line of Credit Key Qualifying Ratios Debt-to-Income ratio (often the limiting factor) < 45% (35% 50%) Based on fully-amortized payment using a 30-year term and an adjusted interest rate (e.g., initial interest rate [5%] plus a margin [2.4%]) Combined Loan-to-Value Ratio: < 60% Home Equity Line of Credit - Typical Structure - Draw Period: First 10 years (Interest-Only payment), Revolving Line of Credit - Repayment Period: Line is frozen, no more draws allowed Next 20-30 years (Fully amortizing payment) - Interest Rate: Variable (Prime Rate plus a Margin), Adjusts monthly - Sample Interest Rate: Initial: 5%, Maximum: 18% Home Equity Line of Credit - How Much Can You Borrow? Example: Documentable Monthly Income: $3,000 - $5,000 Market Value of House: $1,000,000 Mortgage: $0 Age of Youngest Borrower: Not Applicable Credit Score: 740+ Documentable Monthly Income: $3,000 $4,000 $5,000 Approximate Size of Line of Credit: ~ $150,000 ~ $230,000 ~ $320,000 HELOC - Don t Get Overextended (because even Interest-only payment can be large) Interest-only Monthly Payment with $230,000 outstanding on credit line: Interest-Only Payment (5%) $1,333 Interest-Only Payment (18%): 4,800
Other Ways to Unlock Your Home Equity 5 Do you have More Space than you Need? - Consider Downsizing to a smaller home - Consider a Housemate o Invite a friend/relative to live with you and share expenses o Rent out part of your home for extra income (local ordinances permitting) Are you open to Moving to a Less Expensive Area? - Consider Selling Your Home and Relocating Additional Options if your Family Has Financial Flexibility - Private Reverse Mortgage - Sale-Leaseback Related Income Tax and Estate Planning Concepts Property Tax Transfer - You can transfer your Property Tax base to your Child if he/she buys or inherits your house (Proposition 58) - You can transfer your Property Tax base to another property if you are over age 55 and purchase a less expensive home within the same county (Proposition 60) - Santa Clara and San Mateo Counties also allow you to transfer your Property Tax base when moving into the county from a different county (Proposition 90) Cost Basis/Capital Gains - $250,000 Capital Gains Exclusion per person if house is sold during life - Cost Basis of house gets stepped up to market value at death - 100% of Community Property cost basis gets stepped up upon death of first spouse