Now could be a good time to evaluate your housing situation. Mortgage rates are at their lowest point in two years. Additional monthly income can be generated by shifting pent-up equity in your home to more liquid investments.
“Few people with a $250,000 stock portfolio would let it just sit there and not move it around from time to time,” said Charles Dahlheimer, a real estate consultant. “But all these seniors are afraid to touch their homes because they are paid for.”
First, an attitude adjustment about real estate might be in order for a lot of seniors, Dahlheimer believes. Real estate, even a home you live in, should be considered a financial asset. And financial assets of all types should be evaluated.
Recently, market conditions have changed.
The U.S. economy has slowed. As a result, the Federal Reserve Board has cut short-term interest rates in order to stimulate economic activity. A big benefit of the interest rate cut is that mortgage rates have fallen as well.
Currently, rates for 30-year fixed mortgages are about 7 percent in the Chicago area. These rates are expected to hold, or retreat even further, during the first half of the year, according to the Mortgage Bankers Association, based in Washington, D.C.
So what difference does that make if your house is paid for and you don’t have a mortgage?
Dahlheimer suggests that cheap mortgage money can be used to give seniors a higher monthly income. For example, say you own a house worth $300,000, but you still have $30,000 remaining on a mortgage. You’ve been thinking about retiring to a warm climate, such as Florida or Arizona.
You decide to sell the house. You clear $250,000 from the sale. You might use $25,000 of that money for a down payment on a new house. The remainder of the purchase price of the new home can be financed with a mortgage.
Chances are, if you are moving, you will buy a smaller and less expensive house than the one you are selling. In many cases, seniors opt for a condominium or maintenance-free townhouse.
The money that’s left over can be reinvested, say, in stocks that will provide additional monthly income, in theory, at least.
Also, Dahlheimer’s plan does involve some risk.
“This scenario leverages your money in several ways,” said Dahlheimer, president of North American Consulting Group Inc., in St. Louis.
The homeowner uses the equity from a house to receive investment income. The homeowner also gets a tax break, because mortgage interest payments are deductible.
If a homeowner doesn’t plan to move, refinancing the house could also unlock equity that can be reinvested elsewhere.
Another option is a reverse mortgage on the property. A reverse mortgage is a loan that enables a senior homeowner to convert the equity in his or her home into income without selling the home.
How much you get from a reverse mortgage is based on your age, mortgage amount, property value and interest rate. Generally, the older you are, the more money you can get from a reverse mortgage. That’s because the lender figures someone who is age 62 (the minimum age required for a reverse mortgage) will live longer than someone age 82.
A 62-year-old with a reverse mortgage of $100,000 on a $200,000 property would get $453 a month; a 79-year-old in the same situation would get $592 a month.
Several common myths prevent seniors from shuffling their real estate portfolio. Many people, including seniors, still think that any gain made on the sale of a home must be reinvested in another home, or the gain will be taxed. That’s not true anymore.
In 1997, tax laws were changed. Married home sellers can now exclude up to $500,000 in capital gains from taxation; $250,000 for a single person. That essentially eliminated the capital gains tax penalty for most people wishing to trade down to a smaller house.
Another area of misunderstanding is mortgages. Seniors may believe they are too old to get a 30-year mortgage. That’s not the case. Lenders are eager to lend money to qualified borrowers.
“Lenders want to see that you have income. But it doesn’t have to be from a job,” notes Dahlheimer. He prefers a long-term mortgage because of its low interest rate.
“Go for the best rate and terms, not the quickest payback,” he suggested.
At the same time, Dahlheimer notes that no single financing strategy works for every buyer. He recommends that every senior get good financial advice from an expert who understands real estate and other types of investments.
Adult children should be made part of the decision process, too. They are understandably interested in what happens to their parents property, i.e. their inheritance. Also, seniors are notoriously nervous about being taken advantage of and losing their savings. Involvement by family members can help reassure everyone.
Dahlheimer, though a real estate consultant, doesn’t necessarily think the best advice will come from a real estate agent. Too many agents suggest that all the equity from the sale of a home be reinvested in another property, a scenario that doesn’t always work to the benefit of a senior.
Dahlheimer is developing a certification process for real estate agents who want to become finance specialists. Knowledge about financing is the next important trend, he said–really important for seniors too.
Resources
– Details about reverse mortgages and a list of reverse mortgage lenders are available at the Web site of National Reverse Mortgage Lenders Association: www.reversemortgage.org. The Web site includes a calculator that figures the amount of loan you can qualify for. Or, for a list of reverse mortgage lenders and more information, call Fannie Mae at 1-800-7-Fannie (1-800-732-6643).
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Jane Adler is a Chicago-area freelance writer. If you have questions or information to share regarding housing for senior citizens, write to Senior Housing c/o Chicago Tribune Real Estate Section, 435 N. Michigan Ave., Chicago, IL 60611. Or e-mail adler@corecomm.net
