The Advantages Of Downsizing When You Retire

small dog big dog

The obvious ones:

  • Less upkeep
  • Lower utilities
  • Less cleaning
  • Less junk in the garage
  • Lower expenses means more cash on hand

Road blocks:

  • Capital Gains ($250,000 exclusion for single and $500,000 exclusion for married check with your tax professional)
  • Veteran’s benefits (health etc.)
  • Medicaid (if there is any equity or gain in the home while you are living or after you die Medicaid will request repayment)
  • Expense of moving
  • Expense of making your new home comfortable
  • Finding new Doctor’s, shopping, friends

The main reasons:

  • Comfort Zone vs Retirement Dream
  • Upgraded home
  • Closer to grandkids
  • Property Tax advantage in CA (Prop 60/90 transfer your current tax base to your new home if equal or lesser value)
  • *No mortgage payment

Possibly more cash on hand after sale depending if you have a current mortgage that needs to be paid off and proceeds are just enough for a down-payment on new property.

If you don’t think you have enough funds to purchase your retirement dream home with NO mortgage payment take a look at the HECM for Purchase loan aka Reverse Mortgage for Purchase. The program is insured by the government, you remain on Title, there can be equity to leave as an inheritance and much more.  If used properly a Reverse Mortgage can be the most versatile financial product in your toolbox!

Live in the community you love to visit!

Why is there a Retirement Income Problem?

Take Control of your retirement

The reality of our world today and traditional financial thinking just doesn’t work anymore.

I read a pamphlet by Leonard A. Renier a Financial Planner, The Family Legacy, and he asks the question “what in the last several years has the financial services industry done to improve the lives of the average American”?  He is talking about saving for retirement.

This really got me thinking.   They offer a service where you pay them for their advice and you take all the risk on the product/program they sell to you.  This could be mutual funds, stocks, bonds, 401K’s, and insurance.  All in the name of making money for retirement.  Yes, making money not just saving.

How do they expect us to save 20% of our paycheck for the next 30 years in order to retire comfortably?  There are no more 30 year jobs with lifetime pensions.  Salaries have not kept up with the cost of goods, shelter or raising a family in most of the world.  The landscape changed about 10+ years ago and those getting ready to retire or recently retired don’t have enough money either.

The writing has been on the wall for a long time; however we just don’t want to take action.  Why?  Hope, fear, misinformation, outside opinions all contribute to our fear, and fear breeds inaction. Many in the financial services industry are now paying attention to reality.  They are now looking at home equity to bridge the gap.

Nobel Prize-winning economist Robert Merton said in a recent article “the idea of leaving the house as a bequest is flawed”.  He continues “we need to start thinking about the house differently, viewing it as an asset rather than treating is as part of our legacy”.

We must live in the economy that surrounds us.  If you are getting ready to retire are you able to have the same standard of living in retirement as you did when working?    Do you have to work a bit longer? Do you want to work that long?  Will you be able to work that long?  For those that have retired is it the retirement you worked so hard to obtain?

I’m an advocate of Reverse Mortgage.  Not because I sell mortgages, but because I want to have the same standard of living as I do now when I retire, and frankly that just isn’t going to happen unless I tap in to the largest single investment I have ever purchased.  My house.  I was taught to buy a house pay it off and never touch the equity.  Why?  We were not meant to retire with a mortgage payment because in retirement our expenses need to be lower and housing is the highest expense we have.  I can still retire, comfortably and for my life,  in my home with no mortgage payment

Again quoting, Robert Merton “The house is like an annuity.  It provides the housing you need for as many years as you need it”.

I believe, if planned properly, a Reverse Mortgage can be  the 4th bucket of money in retirement planning.

A Housing Solution For “Gray” Divorce Clients

Divorce Decree

Demographic studies reveal that Baby Boomers currently aged 52-70 have the highest rate of divorces and 2nd marriages.  Some of those baby boomers have delayed divorcing until their senior years. “55% of couples were married more than 20 years” according to a report by Susan L. Brown and I-Fen Lin, sociologists at Bowling Green State University.

Divorcing later in life presents more financial problems.    The biggest issue being the home as it is the single largest investment couples purchase together.

  • Do we sell and split the proceeds?
  • What are the tax consequences?
  • Do I buy my spouse out?
  • Can I afford the house on my own?
  • Am I trading equity for liquid assets?
  • I’m ready for Retirement and how will I start over?

All very valid concerns.  The bottom line is both parties will need shelter– whether it is paying a mortgage or paying rent.  Being a Mortgage Consultant I see no upside to paying rent.

If there is enough equity in the house to do a cash-out refinance here are some options:

  • One spouse buys the other out with a Reverse Mortgage and has no mortgage payment.
  • The departing spouse can purchase a new home with a Reverse Mortgage with 50% down and have no mortgage payment.
  • Sell the home, split the proceeds and each buy a new home with 50% down using a Reverse Mortgage for Purchase with no mortgage payment.

By the time we reach retirement we shouldn’t have a housing payment.  Since retirees don’t have the same income coming is as when they were working it just isn’t affordable.

Nobel Prize-winning economist Robert Merton said in a recent article “the idea of leaving the house as a bequest is flawed”.  He continues “we need to start thinking about the house differently, viewing it as an asset rather than treating is as part of our legacy”. “The house is like an annuity.  It provides the housing you need for as many years as you need it”.

Forget what you “think” you know about Reverse Mortgage.  Get the facts of how it can be a responsible tool for retirement.

Got Credit?

Tips to Maintain and Increase your FICO Score

If you’ve had some credit troubles in the past not to worry there is an easy fix.  The “fix” will take effort, consistency, and time.  With these actions you can increase your credit score in as few as 6 months.

FIRST LET’S BREAK DOWN YOUR FICO SCORE

By the way what the heck does “FICO” stand for? Fair Isaac Corporation

credit pie

 LET’S START WITH WHAT TO DO

  • Pay down revolving debt to 30-40% of the credit limit
  • Establish a 2 year credit history with at least 3 different creditors AND pay on time.
  • Have a mix of revolving and installment debt.  Installment refers to a set number of months that the debt will be paid off with set monthly payments such as an auto or mortgage loan.

 

NOW THE TOUGH STUFF WHAT NOT TO DO

  • Open multiple accounts in a short period of time
  • Have your credit run more than 3 times in 90 days
  • Close unused credit accounts
  • C0-sign for anyone, ever
  • Co-sign on Student Loans ever if there is a deferred payment

 

WHAT ABOUT COLLECTIONS AND CHARGE-OFF’s?

  • Collections will be assigned a “payment” based on the balance due
  • Charge-off’s between $250-$1,000 they must be paid in full
  • Charge off’s between $1001-$5,000 do not have to be paid

 

I’VE HAD A SHORT-SALE; A FORECLOSURE ; A BANKRUPTCY

You can buy a home again after 3 years of seasoning with an FHA loan

ARE THERE ANY LOAN PROGRAMS THAT OFFER DOWN-PAYMENT ASSISTANCE?

Yes, many!

Do You Really Understand Your Loan Modification?

I talk to so many people that have accepted loan modification terms, but really don’t understand the nuances.  Those “nuances” are the terms, and can be quite a shock when the term ends.

Granted, not all loan modification are the same; however if you have a loan modification look at it carefully, or ask Jerry or myself to walk you through it.  It might be time to start planning your exit strategy.

 

Forbearance and Repayment Plan

A forbearance is when the lender temporarily reduces payments for the borrower, perhaps to get them through a short-term financial hardship. It can also be a repayment plan which allows you to payback the defaulted amount over a period of time (you must still pay your regular monthly payment).  In other forbearance agreements the lender adds the defaulted payments to the  principal balance and there will be a balance due at the end of the original term of the loan (ie: 30 yr loan).  The lender expects to recoup the full difference at the end of the forbearance period.

Interest Rate Reduction

The interest rate is temporarily reduced for a period of time.  Normally 6 years.  Here is where it gets tricky.  On the start of the 7th year you will be required to refinance, yes, they have actually changed the original term of the loan being due!    In some cases if you have paid on time during the 6yr modification they may extend the terms.  Some interest rate reductions are for the remaining term of the loan. In general, these permanent reductions are given to borrowers whom had perfect credit and full documentation loans from the on-set, due to their assets or employment stability. The interest income that the lender gives up during the rate reduction can be added to the principal of the loan.

Loan Extension

This is a change in the length of the term of the loan. The term may be extended from 30 years to 40 years.  This happens after a certain term (usually 6years) and with a on-time payment record.  The Lender will also look at your credit to determine if you have been able to maintain on payments for all creditors.

Partial Claim

This is specifically for FHA (Federal Housing Administration) insured loans, and is for borrowers that are at least four months delinquent on the property in which they live. The borrower must be able to document the hardship that caused them to miss the payments. They must also be able to prove that they are now capable of making the full mortgage payment, and are unable to make up the missed payments and fees. The fees and missed payments incurred before the loan modification are rolled together into a zero interest second mortgage, and are due when the property is either refinanced or sold.

Principal Deferral

The lender will modify the loan to lower the payments by deferring payment on a portion of the principal balance “principal deferral”.  The new payment will also reduce the principal balance, but only on the modified balance. In addition, the deferral may be for a specific period.  will also reduce the amount of principal that is paid off with each payment. Again, here’s where it gets tricky, on the start of the 7th year you will be required to refinance, yes, they have actually changed the original term of the loan being due!  The deferred principal is due when the property is refinanced or sold, or when the loan matures.

Reinstatement

Not actually a loan modification itself, but is the term used to describe when a delinquent mortgage is made current by the borrower. This means they have caught up on all of the missed payments and paid all the late/missed payment fees that the lender has imposed. The borrower may still have suffered damaged credit, but the foreclosure process is stopped.

After understanding your loan modification it’s time to make a plan.  Many people wait until the time period is up, and find themselves in  a pickle.  It is important during this period to do 4 things:

  • Maintain and build your credit score
  • Do not co-sign for anyone!
  • Reduce bills
  • Save money

If you truly want to stay in your home you must be able to refinance.  You want the best rate and the higher your credit score the better the rate.  If you co-sign for somebody even if they are making the payments it will still count against you ESPECIALLY if they have late payment history.  Obviously, reducing bills reduces stress.  More importantly if you refinance and your mortgage payment goes up the less “other” payments you have the more you will be able to handle the increased mortgage payment.  Save money.  If you are unable to refinance, and you don’t have enough equity to sell and re-purchase you will need money to move, 1st, last and security deposit on a rental, and for general emergencies.

In closing, if you feel that you cannot meet the terms of the loan modification and you are in jeopardy of defaulting again, then it may be wise to sell your home and save your credit to purchase a more affordable home.  If it goes too far and foreclosure proceedings have begun you will not be able to purchase again for 7 years!  If you do a short sale (you owe more than the value of the property) it is still better than a foreclosure.  You will be able to purchase again in 2-3 years.

Stop Renting!