By JUDD MATSUNAGA, Esq
This past year, i.e., 2023, Social Security recipients received an 8.7% cost-of-living adjustment (COLA), the highest in more than 40 years. Yet, despite the rate of inflation growth slowing from the 9.1% peak in June 2022, consumers are still feeling the effects of price pressures. The Senior Citizens League (SCL) announced last week that the newest COLA estimate for 2024 is around 3%. (Source: www.theepochtimes.com, Aug. 11, 2023)
“3%??? That’s not enough!!!” you might say. In a SCL survey of retirees conducted in mid-July, nearly 80% said that essentials like housing, food, and prescription drugs are costing them more today than a year ago. The SCL survey found that 79% of retirees report that lingering high prices continue to impact household budgets significantly. Therefore, the warning: “Seniors Told to Brace for Far Lower Social Security Payment Boost in 2024.”
Around two-thirds of retirees who participated in the survey said that high prices have forced them to put off dental care, including major work like dentures, bridges, and implants. Nearly one-third of retirees said they had postponed filling prescriptions or getting medical care.
According to a Bankrate survey in July, 72% of Americans don’t feel financially secure. Among them, 63% say that high inflation is making it hard for them to be financially comfortable.
If you’re one of the 72% that don’t feel financially secure, this article is for you — especially if you own your own home. If you have calculated that you have enough savings to last another 5 years (3-4 years with inflation), but you plan on living another 10-15 years, what can you do? I know there are many seniors in the **Rafu Shimpo** community that worry about this all the time. But worrying will make you sick. You have options.
“Options???” you ask. You bet! If you own your own home, you are sitting on a gold mine. Did you know that the median sale price of a home in Los Angeles was $1M last month, up 4.3% since last year (according to www.redfin.com). Even if you still owe a mortgage (and making monthly payments), chances are you still have $500,000 or more in equity. Why not tap into that equity to help pay your expenses?
“But I was told to never put a mortgage on my home. If for some reason I can’t pay the mortgage, I could lose my home.” That was good advice 20 years ago, but not any longer. Why?
Because there are loans available now that you never have to pay back — so how can you lose your home??? They’re called home equity conversion mortgages (HECM) — also known as reverse mortgages.
In the Japanese American community, I know of one Sansei from Pasadena that helps seniors (including my clients) qualify for these loans. Scott Shimamoto is a senior loan consultant with Journey Mortgage Advisors in Pasadena. I occasionally run into Scott at Nikkei golf events. So I asked him for some information on HECM loans, here’s what he said….
“Let me simplify it for you. A HECM is a loan that does not require you to make any monthly payments toward principal and interest to the lender. In fact, depending on how much equity you have in your house, it can actually pay YOU money. Important note: You do need to keep current on your taxes, insurance, and HOA dues if applicable.”
So how can this be? Sounds too good to be true? Is it REAL? “Yes, it’s real,” he says. The way it works is that since you don’t immediately pay principal or interest toward the loan, the interest is added to the principal balance and that balance will grow over time. The way the lender gets their money back is that you will pay the loan back when you sell the house (or when you die). This allows you to use the money that is locked into your equity now while you need it.
According to Mr. Shimamoto, there can be many reasons to use a HECM. “Maybe your expenses are increasing, and your income is not, so you’re eating into your savings faster than you want. Or maybe you want to help your children buy their own houses, but you can’t qualify for a traditional loan to tap into your equity. Or maybe you CAN get a traditional loan, but just don’t want to add a loan payment into your budget.
“The HECM is an FHA loan product. That means the Federal Housing Authority has endorsed it and oversees it. Since it is geared toward seniors, they have placed certain safeguards in place to protect seniors. They will not allow lenders to loan you more than you can handle given your home value and equity. They won’t even let you be approved for the loan until you complete a counseling session with an FHA approved a third party counseling organization.”
How do you qualify? Home equity conversion mortgages (HECMs), the most common type of reverse mortgage loan, are a special type of home loan available to homeowners who are 62 and older. Aside from age, other HECM (reverse mortgage) requirements include: Your home must be your principal residence, meaning you live there the majority of the year.
An HECM offers some compelling advantages if your circumstances fit:
● You can plan on staying in your “forever” home, where you are settled, and can perhaps renovate it, allowing you to age in place.
● You can enjoy a reliable cash flow in order to provide more comfortable senior years.
● You need not make monthly payments on the loan balance.
● Your spouse can usually remain in the home even if you die or move to another accommodation.
● You can pay off debt balances, such as medical bills.
● You can use the proceeds to pay off existing mortgages and thereby prevent foreclosures.
● You can fund a grandchild’s education or any other meaningful purpose.
One way to increase your chances of never running out of money is to avoid selling assets like stocks during market downdrafts. That’s where the HECM shines.
“Having a HECM can alleviate having to withdraw assets in a down market,” says Shimamoto. “A key to financial security in your golden years is to make sure your retirement savings accounts, such as 401(k)s and IRAs, can provide the income you’ll need for your retirement years.”
You can take a lump sum of money, a fixed monthly payment, a line of credit where you draw money out of when you need it, or a combination of these. If you have a current mortgage on your home, this will be paid off first, then the remaining loan can be accessed through the methods above. You can continue to draw more funds until you reach the maximum amount. What’s more, you may spend the money however you like, for either urgent or more discretionary spending.
“But Judd, my kids made me promise to never take out a reverse mortgage.” Don’t call it that — reverse mortgages got a bad name. Tell them you’re getting a home equity conversion mortgage. But it’s not right for everybody. Fees tend to be high, including up-front financed origination charges of about 2% and around .5% for annual review of mortgage insurance premiums.
If you are stressing out over the high cost of everything — from food and gas to health care — I would advise you to call Scott Shimamoto at (626) 399-1525. Mr. Shimamoto is well versed in HECMs and will be happy to answer all your questions. He’ll also help you sort through the different options available to you and help you complete the counseling session with an FHA approved, third-party counseling organization.
Let’s explore this option again using “rational thinking.” On one hand, you can tap the equity in your home to have additional money to pay for proper healthcare, possible home care so you can continue living safely at home, or going on a vacation, etc. On the other hand, you can give in to your child’s greed, e.g., I want to inherit the home free and clear. Bottom line, it’s your home.
Furthermore, I’m not suggesting you take every penny out of your home, i.e., leaving your child(ren) nothing to inherit. What I am suggesting is to take enough equity out of your home to live “comfortably.” For example, if your home is worth $1M, you could take out $200,000-$400,000 to add to your savings. If you live another 10 years, and homes keep appreciating in value, there’s a good chance you’ll still be leaving your children $1,000,000 as their inheritance.
There’s only one scenario that I can think of where a HECM may not be a good idea. That’s where your adult child still lives with you at home. If you’ve allowed your adult child to become “dependent” on you, and they won’t have a roof over their head if you die and the HECM has to be paid back, this is different. This may take some careful planning, but I have a possible solution.
This wouldn’t have worked 15-20 years ago. But now that your Sansei children are seniors themselves, you could transfer ownership of your home to your 62-year-old child and they can qualify for the HECM to pull money out of your home to give you more in savings, or opt for a monthly payment to help pay for rising expenses.
But before you start “deeding” title to your home to anyone, go see your friendly neighborhood estate planning attorney first. Ask your attorney for any related documents that will safeguard you from your child selling the home from under you, i.e., your child should give you a “Lifetime Right to Occupy.” Your child should also put the home in his or her living trust to protect you from probate just in case your child pre-deceases you.
One major advantage of this strategy is you can lock in your low Prop 13 property taxes under Prop 19. Eventually, Prop 13 benefits will be gone entirely. Expect a new law in the not so distant future that will eliminate Prop 13 altogether, whether or not the child lives in the home. However, a parent-child transfer now under Prop 19 will “grandfather” in your low Prop 13 taxes. This could save $5,000-$10,000/year (or more) for the rest of your child’s life.
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Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.