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The growth in real estate over the years has been described as a double-edged sword because U.S. homeowners aged 55+ are sitting on an estimated 15 trillion dollars in home equity!
That’s great news if you own a home. But just think how much better it would be if your children or other heirs were able access that locked up money now - instead of renting, or waiting decades until they inherit it.
This book highlights several ways to access your home equity so you can safely and wisely enjoy your later years to the max.
Freed from its shackles you could use this cash in an almost endless number of ways…
* Buy a new, or second home
* Travel
* Start a new business or hobby
* Retire early
* Enhance your lifestyle
* Buy a new car or check off your bucket list
* Establish a rainy day fund
* Pay for home improvements or renovations
* Fund health care costs
* Give, or loan your heirs some of their inheritance early so they can buy a home instead of renting
Dream Big! The opportunities are limited only by your imagination! an answer to this item.
There’s a perception that the retirement “holy grail” is paying off a mortgage without touching their home’s equity. Many homeowners wait until their home is paid off before retiring, which is an avoidable shame; a decision based on emotion instead of financial acumen.
Ask yourself, “Is this the best plan for my retirement?” If you are currently in a job or career you’d like to get out of there is an easier way to retire, relax and enjoy the fruits of your hard work.
Home equity is an important wealth building tool, but because it’s not liquid you may need to sell your home or qualify for a HELOC to access those funds. There are much better ways!
Accessing the money locked up in your home in a form that you can control (such as cash) because one never knows if or when uncontrollable factors like fluctuating home prices, inflation and possible health care expenses could come to visit. Home equity is good in retirement, but cash is better.
Most people during their earning years take money from monthly income and put it into purchasing, making payments on, and improving their homes, and funding retirement accounts.
When we retire, most of us draw money from our retirement accounts and stop contributing to them. The problem with that strategy is that if the stock market is down, we are withdrawing money at the worst possible time, and those withdrawals could be taxable.
The biggest mistake financial planners see is the lack of a vital bridge between clients home equity and a way to meet their retirement spending goals. You’ll learn how to take that pressure off and avoid taxable retirement fund withdrawals during a downturned market.
Some of the strategies we’ll discuss require quite a mental shift from conventional, dated advice and misconceptions.
Retirement these days is a different game with ever changing rules, so it’s important to keep an open mind to new opportunities and ways to access some of your home equity. Some of the solutions we’ll discuss have been around since the 1980’s but are not widely known or understood. We’ll shed more light on those in the coming pages.
Research by the Texas Tech and Boston College for Retirement Research demonstrates how liquidating some of the equity in your home will make you less likely to run out of cash.
When combined with lending products that require no monthly payments, your cash flow could go into overdrive! What’s the point of sitting on all that home equity when it’s doing nothing for you?
Your home is a great place to create and store memories, but is not the best place to store your assets.
A HELOC (Home Equity Line of Credit) is a popular choice for homeowners who wish to extract cash from their home’s equity.
They can be a good option. But beware – they can be a ticking time bomb, especially after the first 10 years!
Example; your home is worth $1M. You have an existing $400K first mortgage balance. If you obtain, say a $300K HELOC (a second mortgage) you would then have access to that amount as a line of credit up to the line limit. You can make repayments whenever you want, paying interest-only for the first ten years.
In that respect, it’s similar to a credit card.
What most people don’t know, is that it can be a ticking time tomb.
Here’s why;
Most HELOC’s are 30 year mortgages that you qualify for based on your income, credit history and assets. They come with an adjustable interest rate. You can make the interest-only payment for the first 10 years, at which point no further withdrawals can be made.
After the ten years is up, the lender only has 20 years left to recoup what you owe, so it becomes a 20 year, fully amortized, fixed rate loan at the prevailing interest rate at the time. Nobody knows what interest rates will be a month from now – never mind ten years!
If you are unaware of the inherent risks of HELOC’s it’s good to learn more to avoid a potential payment shock 10 years after the start date.
HELOC’s have been described as a “ticking time bomb” by financial planners because of the “triple whammy” problem. This can be a very stressful and financially devastating situation for many unsuspecting homeowners.
The ten year ‘triple whammy’:
1. You can no longer make the interest-only payment. Your monthly payment will include principal also
2. Because it converts to a 20 yearfixed there’s another issue – 20 year fixed monthly payments are obviously higher than 30 year fixed payments. And you would be subject to whatever the market rate is at that time
3. You are no longer allowed to make the minimum payment like you could have done during the 1st 10 years.
Pros:
● Interest-only payments for first 10 years. The payments are of course lower because you are only required to pay the interest
● No restrictions on Use of Cash. You can spend the cash however you choose
● Total flexibility. You can make principal repayments whenever you wish and there is no restriction on when, how much, or how often you make repayments to reduce your outstanding balance or withdraw cash
Cons:
● “Ticking time bomb” effect. As mentioned, there is a risk of a large payment shock 10 years after the loan begins. This can be a huge problem, and the information on this risk is usually overlooked because the disclosures are enclosed with multiple other documents at the signing table.
● Higher interest rates than first mortgages with very high lifetime caps.
The fully-adjusted interest rate for HELOC’s is higher than first mortgages, and they come with a lifetime interest rate cap. At the time of writing, the ‘Life Cap” is in the 15 – 20% range!
Note: fixed rates are available. These are known as Home Equity Loans. But as you can imagine, due to the high interest rate and fully amortized aspect, the monthly payments would be very high.
● HELOC’s are recourse loans meaning that if you run into financial issues, including insufficient equity in your home to repay the loan, the lender can go after your other assets like bank and brokerage accounts and other real estate assets.answer to this item.
Returning to the previous scenario, let’s look at another popular option – cash out refinances.
Example: let’s say you own a home worth $1M with a 30 year, 3% interest rate fixed mortgage, with an outstanding $400K balance. You refinance into a new $700K first mortgage and walk away, at close of escrow, with a check for $300K minus closing costs (if any).
Pros:
● The convenience of having only one mortgage on your home. Very simple because you only need to make one monthly payment
● No restrictions on use of cash. You can spend the cash however you choose
● Fixed rate. No surprises down the track because your interest rate is fixed. Most borrowers prefer a 30 year fixed mortgage
Cons:
If your current mortgage rate is very low, it is unlikely to make sense to replace it with a larger size mortgage at a higher rate (example, 3% rate currently replaced with a 6% new, larger first mortgage) an answer to this item.
Many financial planners view HomeSafe Seconds and HECM's as great options because of the very positive effect they can have on monthly cash flow. With no payments required, the non-recourse aspect, and the HECM’s automatic annual line increase they present a great option.
Click here for 2 minute video overview
With this great product, you can keep your low-interest rate first mortgage with the HomeSafe Second in 2nd place behind it.
Pros:
● No monthly payments required. Improves monthly cash flow by eliminating monthly mortgage payment
● No restrictions on use of cash. Spend the cash however you choose
● May reduces taxes. Depending on your personal situation you may be able to avoid taxes by reducing or minimizing retirement withdrawal taxes and / or income/capital gains taxes by using the tax-free cash you receive from either of these programs. You generally receive the proceeds of the loan as tax-free cash in which you can use the money as you see fit. It is recommended though to speak with your financial advisor to verify your specific situation
● You continue to live in your home and retain the title it. You continue to pay your property taxes, insurance, and maintenance
● You do not make any monthly mortgage payments during the course of the loan
● Both products are non-recourse loans which means neither you or your heirs are liable for any amount of the mortgage that transcends the value of your home.
● You choose the disbursement option (HECM). There are several ways in which you can receive the proceeds of the loan.
Cons:
● In some instances, the cash received can affect a homeowner's eligibility for government benefits. Low incomebenefits like Medicaid and SSI. Income from a HECM or HomeSafe Second however likely won't count against them
● Initial fees tend to be higher than first mortgage refinances. The good news is that almost all of them can come out of the loan proceeds to avoid the need to fund them with upfront cash
Howard Davies moved to the US from England in 1991 and has been licensed to originate California loans since 1997. In his first year, he closed 90 mortgage transactions with a volume of over $25,000,000 making him the runner up in the annual Mortgage Originator Magazine "Nationwide Rookie Of The Year Award".
Howard is affiliated with American Family Funding Group in San Jose, CA. They have access to numerous California reverse and traditional mortgage lenders as well as conventional, FHA and VA loans. He works with a handful of top Realtors®, CPA’s, Retirement and Financial Planners.
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For FREE California reverse or traditional mortgage advice, call or text Howard at: (408) 533-2467 or email: howard@howardEdavies.com
Copyright 2024 © By Howard Davies
For information please contact:
Howard Davies
email: howard@howardedavies.com
Phone: (408) 533-2467
LEGAL DISCLAIMER
This book is presented for educational purposes only. While every effort has been made to present accurate information the author makes no warranties or representations of any kind and assumes no liabilities of any kind regarding the completeness or accuracy of any information in this book and specifically disclaims any implied warranties of merchantability or fitness of use for a particular purpose. The author shall not be held liable or responsible to any entity or person with respect to any consequential or incidental damages caused, or alleged to have been caused, indirectly or directly, by the information contained herein.
Every borrower scenario and lending institute is unique, and the strategies contained herein may not be suitable for you and your unique situation. You should always seek the advice of a retirement and /or financial planner and tax professional before obtaining any financial service or product and in no way is this book intended to present broad reaching financial or tax planning advice. Every borrower is unique with a unique personality, needs, and financial scenario.
The information and opinions in this book are those of the author alone and do not represent any broker he is affiliated with and nor have they reviewed or approved the information contained in this book.
The material contained in this book is not produced or approved by FHA, HUD, AARP or Finance of America nor any government agency though they may be mentioned in this book for clarification. However it is recommended their rules and guidelines are read in full. Rules, programs and guidelines change frequently and so the information in this book could be outdated at any time.
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