HOW TO TRADE-UP (OR DOWN) USING A REVERSE MORTGAGE

Houses on stacks of coins and calculator on dollar bills

Home prices in many markets have gone up recently.  This is leaving many retirees with sticker shock when it comes to trading up, or even trading down.

Consider Anna and Olaf who are in the process of selling their $400,000 home.  They’ll be left with net proceeds of approx. $364,000 after paying 9% in sales expenses (transfer taxes, real estate commissions, etc.).  The new house they want to purchase costs $500,000, leaving them $136,000 short.

  • Option 1: sell or liquidate $136,000 worth of investments or retirement assets. They will need to “gross up” the withdrawal for taxes if the funds are in a taxable account such as a conventional 401(k).  Assuming a 25% tax bracket, they will actually need to withdraw $181,333 from the account, pay their 25% income taxes, and walk away with net proceeds of $136,000.  Ouch!
  • Option 2: use a $136,000 Home Equity Conversion Mortgage (HECM), also known as a “reverse mortgage”. In this case, there would be no monthly mortgage payment.  Anna and Olaf could preserve their retirement assets and buy their new home without any impact on their cash flow.

Please contact me for more information or if you’d like for me to run the numbers for your situation.

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Real Estate Values Today Compared to Pre-2008 Peak

Real Estate Values Today Compared to Pre-2008 Peak | MyKCM

This housing market has many people talking about home values; where they are and where they are headed. It’s also interesting to look back and see how home prices compare to values prior to the housing crisis.

Every quarter, Freddie Mac releases their House Price Index. The index usually provides monthly home values for:

  • the nation as a whole
  • each of the 50 states
  • 367 metropolitan statistical areas

This quarter, the report also included a look at today’s home values as compared to Pre-2008 values. Here is a graphic that breaks down the numbers on a state-by-state basis:

Real Estate Values Today Compared to Pre-2008 Peak | MyKCM

Home Sales Up in Every Price Range over $100K!

Homes Sales Up in Every Price Range over $100K! | MyKCM

The National Association of Realtors’ most recent Existing Home Sales Report revealed that home sales were up rather dramatically over last year in five of the six price ranges they measure.

Homes priced between $100-250K showed a modest increase at 3.4%. This not only points to the lower inventory of homes available for sale in this price range but also speaks to the overall strength of the housing market.

Sales of homes over $250,000 increased by double digit percentages with sales in the $750,000- $1 million range showing the largest increase, up 16.7%!

As prices in many markets continue to accelerate, it is no surprise to see the percentage of homes in the higher price ranges increasing.

Here is the breakdown:

Homes Sales Up in Every Price Range over $100K! | MyKCM

What does that mean to you if you are selling?

Houses are definitely selling. If your house has been on the market for any length of time and has not yet sold, perhaps it is time to sit with your agent and see if it is priced appropriately to compete in today’s market.

Real Estate is Best Long-Term Investment

Americans Believe Real Estate is Best Long-Term Investment | MyKCM

According to Bankrate’s latest Financial Security Index Poll, Americans who have money to set aside for the next 10 years would rather invest in real estate than any other type of investment.

Bankrate asked Americans to answer the following question:

“Which would be the best way to invest money you did not need for more than 10 years?”

Real Estate came in as the top choice with 25% of all respondents, while cash investments (such as savings accounts and CD’s) came in second with 23%. The chart below shows the full results:

Americans Believe Real Estate is Best Long-Term Investment | MyKCM

Sterling White, co-founder of Holdfolio, gave one reason as to why real estate may have ranked so high.

“Houses are tangible. You can physically see and feel the product. So you know where your money is going.”

July’s poll also found that for the “26th consecutive month, Americans’ sense of financial well-being improved when taking into account debt, savings, net worth, job security, and overall financial situation.”

Bottom Line

There are several reasons, both financial and non-financial, as to why homeownership makes sense. It is nice to see that Americans have returned to a belief in homeownership as the best investment.

Baby Boomers Are On the Move

Baby Boomers Are On the Move | My KCM

According to a Merrill Lynch study“an estimated 4.2 million retirees moved into a new home last year alone.” Two-thirds of retirees say that they are likely to move at least once during retirement.

As one participant in the study stated:

“In retirement, you have the chance to live anywhere you want. Or you can just stay where you are. There hasn’t been another time in life when we’ve had that kind of freedom.”

The top reason to relocate cited was “wanting to be closer to family” at 29%, a close second was “wanting to reduce home expenses”at 26%.

A recent Freddie Mac study found similar results, as “nearly 20 percent of Boomers said they would move closer to their grandchildren/children compared to 13 percent who said they would move to a warmer climate.”

Not Every Baby Boomer Downsizes

There is a common misconception that as retirees find themselves with fewer children at home, they will instantly desire a smaller home to maintain. While that may be the case for half of those surveyed, the study found that three in ten decide to actually upsize to a larger home.

Some choose to buy a home in a desirable destination with extra space for large family vacations, reunions, extended visits, or to allow other family members to move in with them. According to Merrill Lynch:

“Retirees often find their homes become places for family to come together and reconnect, particularly during holidays or summer vacations.”

Bottom Line

If your housing needs have changed, or are about to change, let’s get together to discuss your next steps.

Homeowner’s Net Worth is 45x Greater Than a Renter’s!

A Homeowner’s Net Worth is 45x Greater Than a Renter’s! | MyKCM

Every three years, the Federal Reserve conducts a Survey of Consumer Finances in which they collect data across all economic and social groups. The latest survey, which includes data from 2010-2013, reports that a homeowner’s net worth is 36 times greater than that of a renter ($194,500 vs. $5,400).In a Forbes article, the National Association of Realtors’ (NAR) Chief Economist Lawrence Yun predicts that in 2016 the net worth gap will widen even further to 45 times greater.

The graph below demonstrates the results of the last two Federal Reserve studies and Yun’s prediction:

A Homeowner’s Net Worth is 45x Greater Than a Renter’s! | MyKCM

Put Your Housing Cost to Work for You

Simply put, homeownership is a form of ‘forced savings.’ Every time you pay your mortgage, you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth.

The latest National Housing Pulse Survey from NAR reveals that 85% of consumers believe that purchasing a home is a good financial decision. Yun comments:

“Though there will always be discussion about whether to buy or rent, or whether the stock market offers a bigger return than real estate, the reality is that homeowners steadily build wealth. The simplest math shouldn’t be overlooked.”

Bottom Line

If you are interested in finding out if you could put your housing cost to work for you by purchasing a home, let’s get together to discuss your next steps.

Facts & Myths of Social Secuity

Social Security remains a confusing topic, and misconceptions could multiply as the presidential campaign swings into high gear. Though the leading candidates haven’t yet turned this into a prominent campaign issue, it’s bound to gain more visibility. Here’s a look at a few myths and misunderstandings, and a couple accurate claims, you might hear on the election trail or elsewhere:

• Social Security is heading toward bankruptcy.

False, though the answer somewhat depends on how you define bankruptcy. Social Security will have money to pay retirement benefits for decades to come, even if needed reforms are not made. It’s just that the program won’t have the means to meet all its scheduled obligations. Social Security’s trustees estimate the program, in the absence of reforms, will be able to pay only about 75 cents on the dollar by 2034.

Reforms still can be made to strengthen Social Security, and the sooner they’re made, the better. “The program is getting close to the point of no return,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget.

• Everyone has Social Security assets held in a personal investment account.

False.  Social Security isn’t an investment fund but, rather, a pay-as-you-go system that transfers money from workers to retirees. “The taxes paid by today’s workers and their employers don’t go into dedicated individual accounts,” noted Pew Research in a report. “Nor do Social  Security checks represent a return on invested capital.” Yet nearly one-third of Americans believe they have dedicated Social Security accounts, according to a 2014 Pew survey.

• Social Security will be around for today’s young adults.

True. Despite skepticism felt by many young adults that they’ll ever see any money from Social Security, and despite the well-known funding problems that could result in benefit cuts, the program will keep going unless Congress dismantles it, which isn’t likely. “Saying Social Security won’t exist isn’t true and won’t help the debate,” said Goldwein.

• Social Security would have remained solvent if Congress hadn’t raided the trust fund.

False. The trust fund refers to a surplus of $2.8 trillion that has been building for the past three decades, from payroll-tax revenue exceeding benefit payments over that period. The surplus is stored in special Treasury bonds, but so what? It’s largely an “accounting fiction,” not money stashed away for future generations, wrote Paul Solman, co-author of Get What’s Yours, a book explaining Social Security benefits. These surpluses will start to shrink in coming years.

The money has been used to fund other government programs, so in a sense it could be argued that Congress and various administrations raided the trust fund, said Goldwein. However, the full $2.8 trillion still is owed by the government to Social Security and most projections assume it will be repaid through some combination of reduced government spending, tax increases or federal borrowings.

• Taking a big IRA withdrawal can make your Social Security benefits taxable.

True. So can other sources of taxable income.

If Social Security is your only source of income, your benefits probably won’t be taxable. But if you have other income, some of your benefits might be taxable. For example, many people who diligently saved using a traditional IRA could get hurt by mandatory withdrawals, which start after investors reach age 70½.

• If you’re working while receiving Social Security, you will lose benefits.

Mostly false. Some benefits will be reduced, assuming you’re still below full retirement age (between 66 or 67 for most people now employed).

How much gets deducted depends on your age and how much you earn. For 2016, if you remain below FRA throughout the year, the Social Security Administration will deduct $1 in benefits for each $2 earned above $15,720. If you reach FRA during 2016, it will deduct $1 for every $3 earned above $41,880.

However, these benefits aren’t lost but delayed. After reaching full retirement age, your benefits will increase to account for amounts withheld earlier. And once you reach full retirement age, you get to keep all your benefits, even if you’re still working.

Provided by Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.