The Housing Bubble and the new normal
If you’re one of the countless number of seniors heading into retirement carrying housing related debt, then you are the new normal.
When the housing market bottomed out in 2009 it put pre-retirees in a precarious position. Not only did their investment accounts take a hit but most also lost up to 50% of their most valuable asset, the equity in their home. Even though their equity disappeared they were stuck with a mortgage payment. And having that payment was the difference between a stressful or a secure retirement.
Often considered a byproduct of the housing market crash, the growing number of older households carrying housing-related debt into their retirement years doesn’t appear to be a short lived phenomenon, according to a new analysis on seniors’ housing impact and retirement security.
Related: The Hidden Cost of Retirement
One clear trend that has emerged is the share of older households carrying mortgage-related debt into retirement continues to increase, as well as the amount of this debt, according to a recent brief from the Center for Retirement Research at Boston College.
How will a high debt-to-income ratio affect retirement?
“Combined with lower house prices after the bubble burst, these trends significantly reduced net housing wealth and undermined retirement preparedness and financial flexibility for a substantial share of households in 2013,” writes the research team led by Alicia H. Munnell, director of the Center for Retirement Research at Boston College and a 52% Debt-To-Income ratio(including housing) is a scary number even for someone not close to retirement. For someone contemplating retirement it could mean postponing retirement or having to sell the family home to get the figure to a manageable amount.
4 Solutions for getting rid of credit obligations heading into retirement:
If you’re worried about a high debt-to-income ratio heading into retirement, it’s time to find a solution for that problem. Of course you can continue buying lottery tickets or you can try one of these:
Finally have the Big M conversation
Perhaps the most difficult from a pride perspective but a viable solution if your high DTI is a short term problem. It starts with having the Big M (money) conversation with your heirs. It’s time to explain your retirement dilemma and make this a family decision.
Traditional cash out forward mortgage
If your current mortgage is at a higher than current market interest rate and you have the equity to incorporate your other consumer debt, refinancing into one lower interest rate loan will improve your monthly cash flow. However, you’re signing up for another long term mortgage that requires a monthly payment. Make sure you can make that payment 5 or 10 years from now with your retirement income.
Home Equity Line of Credit (HELOC)
Of all your choices a HELOC is by far the least expensive option. Many institutions offer low or no closing cost options. However most also have a minimum credit score requirement (usually 700) and according to recent legislation many impose a maximum debt-to-income ratio of 45%. A monthly payment is required on only the portion of funds that you have used. Minimum payment is generally just the accrued interest for that month.
Retiree’s Equity Line of Credit (RELOC)
An option of The New Reverse Mortgage a RELOC functions very similar to a HELOC with the exception that monthly payments are optional. Interest only accrues on the outstanding funds. RELOC closing costs are higher than that of a HELOC. A RELOC is guaranteed by the Federal Housing Administration and as a result mortgage insurance is required. Unlike traditional mortgage insurance this policy guarantees the terms of the loan for as long as you occupy the property AND because it is a non-recourse loan there is no residual liability to your heir or estate in the event your home value should drop below the outstanding balance owed.
Comparing a RELOC with a HELOC
The New Reverse Mortgage isn’t for everyone…but it could be!
If you’re still wondering if The New Reverse Mortgage is the right solution for you but you’re not ready to sit down with one of our Reverse Mortgage Experts, then we’ll be happy to mail (or email) you Use Your Home to Stay at Home which is the official federally approved consumer booklet for those considering a reverse mortgage.
Some of this information first appeared on reversemortgagedaily.com