Losing The Conventional Wisdom, Part II

Yes, You Can Retire With A Mortgage

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I recently read a post by a young finfluencer about something called the “family opportunity mortgage.” No doubt searching for fresh content, she rightfully made the point that it’s possible to use this tool to help your retired parents own a home. The challenge, however, is that the Family Opportunity Mortgage Program has been discontinued, so you can’t go to a lender and ask for one.

But it made me think about the larger “gotcha” of being retired: since you can’t show income, home lenders don’t want to speak to you. No matter that you have assets, and your current home is mortgage free, these folks won’t give you a conventional home equity line of credit (HELOC) because they can’t show repayment out of cash flow. And lenders always want to know how they will be repaid.

So, what’s left for you if you need to use the equity in your home to help fund retirement? Basically, you have two options: a reverse mortgage or a reverse mortgage line of credit. Now before you shut me down, let me state categorically that Tom Selleck and his dimples are not lying to you. The product, which once could have been described as predatory, is a perfectly good solution to accessing your home’s equity in retirement. That said, it works best earlier in retirement, before you’ve gone through all your savings. It also provides some nifty solutions for estate and tax (avoidance) planning late in life.

But you’ve spent your whole adult life emotionally invested in the notion of not having a mortgage, right? Are your 20th century truths being undermined by learning you shouldn’t have paid off your (probably low-interest) debt? In a word, yes. As a matter of fact, you probably should have already switched your focus from overpaying your mortgage to making sure you had no credit card debt and had substantial savings and investments in multiple tax-diversified buckets. (Don’t shoot the messenger. It’s #mathnotmagic. And let’s all agree to share this with our daughters, who will someday be #WOACA like us.)

When I’ve worked with clients who wanted to retire, I became the voice of mathematical reason about a subject people usually approach emotionally. Face it: you can’t eat your home equity. It’s not a liquid asset. What’s more, people fail to factor ongoing home maintenance into their retirement equation. So, how will we pay for that?

I love that you adore your “forever home.” But if you’ve lived there for 25 years, soon you’re going to need a new roof or some other major repair or replacement. Imagine how it will feel to take $30,000 out of your IRA for that major project. I bet that’s not nearly as satisfying as spending it on a world cruise or your grandchildren (or if you’re one of those people who have both the means and the patience, a world cruise with your grandchildren).

If you plan to stay in your house in retirement, I recommend the following:

• While you still show income, take out a home equity line of credit (HELOC). These are usually good for 10 years. Don’t use it until you need it for home repairs. But have it open and at the ready. If you already have a HELOC, make sure you know when it expires and consider refreshing it for another 10 years.

• Have a 50% line of credit (margin line) against your non-retirement brokerage account. I’m not telling you to trade stocks “on margin.” I’m advising you to line up your sources of liquidity, so you never have to take money out of the market at a bad time. You can repay yourself with mutual-fund dividends, growth, and capital gains. This way, if you do need to commit funds for home repairs, you have a place to turn other than your cash savings.

• If you have significant equity in your home and you know you’re going to need some of it to fund your retirement, consider refinancing before you retire. If the payment comfortably fits your cashflow, there’s no crime in having a mortgage during retirement. Don’t let anyone tell you otherwise. Mortgage interest is still deductible (to a point) if you itemize your taxes. Are interest rates high? That’s relative. You’re reading this from a person whose first mortgage was 11.8%, and that was a bargain in the ‘80s. From a planning perspective, mortgage interest is considered “productive debt.” In other words, it provides a benefit by enabling you to live comfortably in your home. (That’s important.) Certainly, ensure that you’ve cleared all credit card debt before you retire. And figure out a plan for how you will address the need to purchase/lease replacement automobiles. But feel free to hang onto your mortgage for as long as you have your house.

• If you’re already retired and don’t know if you’ll need to sell your house down the line but don’t want to, then a reverse mortgage line of credit may be for you. Banks must first scrutinize your understanding of how it works. But rest assured, you cannot lose your home. And, if your home is “under water” in value when you finally leave it, because you’re moving into assisted care or you die, the lender cannot come after your family or estate for the difference. 

Now, let’s discuss the Family Opportunity Mortgage. Again, the program no longer exists, but here’s what it was intended to do. Basically, it made it easier for a family member to buy a second home for a child with special needs or parents who didn’t qualify for a mortgage because they didn’t show income. 

Those of you who have applied for a mortgage on a second home or investment property have, no doubt, been unhappy to discover that mortgage terms (such as down payment requirements and interest rates) are not nearly as good as those on a primary residence. The Family Opportunity Mortgage Program created a definition of owner occupancy that included family members, thus applying the preferred FHA terms and rates to this type of second home.

While it doesn’t assist you directly as you prepare to retire, the Family Opportunity Mortgage owner occupancy “definition” is honored by many lenders. As a result, you may be able to use your income to take a mortgage for your parents and have them pay you “rent” from their assets.

Let’s put a pin in this for a later discussion because first we need to get used to the idea that we will be a nation of people funding both our children and our parents at the risk of our own retirement savings. The Family Opportunity Mortgage Program was an attempt to have policy catch up to our new reality. I sincerely hope that we’ll see more creative solutions in the future.

#WeRescueOurselves #TripleDeckerClubSandwichGeneration

Reading:  Jamie Hopkins, PhD, JD Rewirement: Rewriting The Way You Think About Retirement

© 2024 Madrina Molly™

The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice.

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