I am in my 30s, gainfully employed and married, but I still have significant student loans and I don’t expect to have a lot of extra funds in the near future.
My parents are in their 60s and 70s and live nearby. My stepfather is in his early 70s, and receives Social Security retirement. He earned an upper-middle-class income while working, but I don’t think that he gets the maximum amount because he retired at 65 without realizing that wasn’t his full retirement age.
My mother is in her early 60s and has mostly been a stay-at-home mom; she will likely end up claiming her Social Security retirement based on my stepfather’s earnings. Currently, she works part-time. I believe they have about $300,000 saved in their retirement and savings accounts. They bought their house in 2009, and currently owe about $160,000.
“ ‘The market value of the house has gone from about $200,000 in 2009 to $450,000.’ ”
The market value of the house has gone from about $200,000 in 2009 to $450,000. My parents want to use their retirement savings to pay off their mortgage in order to save money on interest. This would leave them with very little in savings, but a decent amount in equity. I also understand that they would save a lot of money in interest by paying off their mortgage, but I am concerned that if something happens to their house they will be left with nothing.
On the other hand, if they keep their retirement money but somehow fall behind on their mortgage in the future, I would be less worried because I know that foreclosure is a very slow process and they would have ample opportunities to save their home. I would like to be able to help them financially and be their safety net, but my means are limited. I’ve tried to advise them, but I’m not a financial expert, and I don’t know if I’m being too cautious.
Daughter Who Wants to Help
Sometimes, asking the right questions and doing so early in the process is just as important as having the money yourself to make everything better. Often times, it’s more important. Falling behind on mortgage repayments would affect their credit rating — and, should they ever need to take out a loan, that would clearly be a problem.
But overall, they are in good shape. Few Americans are in great shape, especially when they compare their own finances to the money milestones set out by financial advisers. They are goals, after all, and not everyone is able to make them a reality. They have the choice to downsize, which gives them wiggle room if they need more cash.
“ ‘Few Americans are in great shape, especially when they compare their own finances to financial advisers’ goals.’ ”
The decision to pay down a mortgage is a big one, as your parents are giving up a chunk of change that could function as an emergency fund should they need it. But it all depends on your parents’ circumstances and their projected needs. In the meantime, here is a three-step approach with excerpted advice from three different financial advisers:
Brian Walsh Jr., a senior financial adviser at Walsh & Nicholson Financial Group: “Step back and create a budget spreadsheet so you can get a handle of overall cash flow for your parents. Find out what their interest rate on the mortgage is and refinance if possible. A refinance would allow them to potentially decrease their monthly payments and increase cash flow.”
Joe Lum, a certified financial planner at Intersect Capital: “House rich, but cash poor. Traditionally, we see this scenario with younger clientele who have saved up enough money to be utilized for a down payment on their first home. Luckily for most young investors, they hopefully have many years of gainful employment and earning abilities.”
For older clients, it can be problematic, especially if your parents don’t want to downsize. “While the security of being debt-free can be alluring, tapping into the home’s equity can be challenging once retired given that most credit facilities (a primary mortgage and/or a home equity line of credit) are based on a calculation of debt to income,” he said.
“ ‘So you can see the overlap: downsizing and a cautious approach to plundering their retirement savings.’ ”
“Barring an intolerable interest rate compared to the market, for most clients who are retired it makes sense to maintain the flexibility and liquidity of their retirement savings in lieu of paying off the mortgage,” Lum added. “The important part, however, is ensuring that those retirement savings are invested to help offset the cost of maintaining the mortgage.”
Jared Snider, a senior wealth adviser at Exencial Wealth Advisors: “I would be hesitant to suggest they use over half of their liquidity to pay down the mortgage. Given the rise in their home value, I would ask whether they have considered selling their current home and purchasing a home that would allow them to pay for the replacement home.”
A reverse mortgage is another alternative to tap equity on their home. Also known as Home Equity Conversion Mortgages, they are available to homeowners aged 62 or older. The lender pays the borrower, and to qualify your parents must have enough equity to pay off the loan. They can be cumbersome and costly; plus, your parents would have to pay interest and upkeep on their house.
So you can see the overlap: downsizing and a cautious approach to plundering their retirement savings. They have you on their side, and given their ready cash it makes sense to hire an adviser to talk through their options, expectations and concerns. I wish you the best of everything, and it’s a pleasure to receive a letter in which everyone wants the best for each other.
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