How to Avoid Outliving Your Money Using Home Equity in Retirement

Mary Jo Lafaye (00:00)
It’s something that most people think, I have to sign my house over to the bank and my kids aren’t going to get anything. What they don’t realize is that you know the loan usually starts out at you just a fraction of the home value. So you have a small loan accruing interest, but you have a large home value appreciating. So especially in areas where there’s high appreciation, like what we call the parentheses, the east and west coast, ⁓ those areas, ⁓ homes tend to appreciate more rapidly.

Dylan Silver (00:00)
Hey folks, welcome back to the show. Today we’re joined by Mary Jo Lafaye, a retirement mortgage specialist in the Bay Area of California, with over two decades helping homeowners age fifty-five and up unlock the equity in their homes to create greater financial flexibility. Mary Jo, thanks for joining us here today.

Mary Jo Lafaye (00:20)
Thank you, Dylan. It’s a pleasure to be on Investor Fuel. I’m looking forward to chatting with you.

Dylan Silver (00:25)
When folks are starting this conversation, where does that conversation begin when they need to access the equity in their home?

Mary Jo Lafaye (00:38)
So I— I work with a wide variety of people looking to— to fix all sorts of financial situations and housing goals in retirement. And it really starts with sitting down and kind of getting a overview of where they are now. If they have the majority of their wealth in their home equity or other investment properties, then we get a list of that, you know, what are their monthly expenses? Where is their wealth sitting, how is it creating income for them, and where are the deficiencies? Sometimes I meet with people who have accumulated a lot of credit card debt and that’s really a tail— telltale sign that they need to make a big change fast because that’s— that’s high-interest debt that’s not going to serve them well in any capacity. So kind of getting a feel for where they are financially, how they’re invested, where their cash flow is coming from, if it’s taxable or not. I’m not a tax or financial advisor, but we just collect all this information and kind of get a list of the questions that they need to ask their other professionals. I often do bring in their CPA, their financial advisor, their realtor, anybody who’s advising them on portions of their wealth. So we kind of get an overview in that— in that regard. And then what are their goals? Do they want to downsize or right size? Do they want to take some of the wealth that’s currently in their home equity and redistribute that into maybe investing it into another asset class that would create cash flow? Or do they just want to get a credit line against their home and stay there? So really getting an overview of where they’re at and where they want to go. What— what are their goals for that next chapter?

Dylan Silver (02:25)
On a granular level, are most folks aware of the mechanisms involved in a HELOC, right? Or are they coming to you really saying, “Look, I’m not sure how this works, but I believe I’ve got some equity in my home. What do I do?”

Mary Jo Lafaye (02:42)
That’s a— that’s a really good topic that I— I feel pretty strongly about. I— I feel like Americans in particular have not had the financial education that they could benefit from. There’s a lot of room for growth there. And that’s why I work so collaboratively with other professionals because when I sit down with a client, I’m not just trying to get them alone, right? I’m trying to reposition them for a healthy, secure, and more enjoyable retirement where they can eliminate or at least substantially reduce the chance of running out of money or having to downsize their life dramatically, right? By kind of repositioning themselves at the right time and in the right ways, they can also increase the longevity of their spending power and their cash flow. So I look at it from that angle as really a holistic planning tool. And like I said, I’m not a financial planner or a tax advisor, but I work closely with those professionals to really help build the best and most advantageous and economical solution for my clients.

Dylan Silver (03:51)
We were talking in the green room. You mentioned a couple of scenarios that are— are common. and I think one of the things that can be challenging for people is you don’t want to outlive your money, but you also feel like, “Well, I don’t want to take on additional debt too.” And so when you’re having these conversations with folks, is there any one scenario that you see often come up?

Mary Jo Lafaye (04:14)
One would be really isolating a lot of the other— other things that come up because it’s really a— a broad range of needs that I can address. When you hit retirement, people don’t realize when they’re younger that all of a sudden one day your paychecks end and that’s it. There’s nobody getting— giving you a check each month. Now it’s up to you to look at all your assets that you’ve accumulated. And usually home equity is the largest—not always for savvy investors, they may have more invested, but for most of Americans, for about 80% of Americans, typically their home value, their— their housing wealth that they have in their home equity, their primary residence, makes up 60 to 80% of their net worth. So looking at that and kind of dissecting how can we take that huge pile of wealth, that huge bucket. Right? They have other buckets. They have their Social Security bucket, their pension bucket, their life insurance bucket, their 401k bucket, their Roth bucket, you know, whatever they have, whatever they’ve invested in. Maybe they have a small business that they’re gonna get income from or sell and get payments from that. so there’s all these buckets, and suddenly the paychecks coming from an outside source are over, and you have to look at all these assets that you’ve created during your working years. And figure out how to— how to draw distributions from those assets in the most efficient way. And that’s tax efficiency, that’s buffering market volatility. If you’ve got a lot of your money invested in the stock market, you’re subject to a lot of volatility. And some people invest a lot more conservatively as they get older. Whereas if they have this tool, this home equity credit line that is provided and insured by FHA—if— well, it’s provided by lenders, insured, regulated, and insured by FHA. If they have a tool like that to draw from when the market’s losing value, they may end up with two or three times more wealth than they started with versus running out of that wealth as they age. So really being strategic in where you get your distributions from throughout your retirement. And setting up the tools early in retirement to be able to do that is the key to even leaving a larger equity legacy than you could otherwise. So there are a lot of— lot of factors to look at, a lot of buckets. I always tell my clients, life is a balance sheet and retirement is a balance sheet on steroids. Like, you’ve really got to pay attention. The money’s going to come from somewhere. So where’s the most economical and strategic place that’s gonna protect your overall assortment of buckets?

Dylan Silver (07:09)
How often are folks in a position where they think they need to sell their home and they’re coming to you and they’re saying, “I think I need to— to— to sell here,” and you’re realizing you don’t have to sell, but you— you may have to take advantage of, you know, a— a HELOC, a reverse mortgage, right? We need to look at some of these alternatives to selling.

Mary Jo Lafaye (07:29)
Right. Yeah. That’s what’s so great about the retirement mortgage. The— the— the ability to really make a choice. Most of my clients come to me and they do have a choice whether they’re gonna stay or sell. Some of them have to sell. You know, they have so much debt and maybe they have tax liens and they have a failing business they’ve been feeding. So they’ve got a small business administrative of— l— SBA loan that they’re— they’re delinquent on. So there’s all sorts of problems we can solve. But I really sit down and— and show them— a lot of people come to me and say, “You know, I want to stay in my house for the rest of my life no matter what.” And I say, “Okay, that’s what this— here’s, here’s what that looks like. Here’s the amortization to show you over time how we can achieve that and what that would look like. And then here’s what it will look like if you consider downsizing or right sizing. Maybe you want to move closer to your children and your grandchildren. That’s a big motivator for people in retirement to live close to those cute little grandchildren.” Showing them how they can achieve that and take some of the wealth from sitting in their existing home, their home that they’ve maybe been in for 30 or 40 years, how to take some of that wealth, use it in combination with a modern retirement mortgage to buy their next home and put some of it back into their investment accounts that maybe they’ve depleted too early. And so it’s a repositioning of what is typically someone’s largest asset. And that can be— it just changes the whole landscape of the rest of their retirement. And it’s— it’s basically two transactions. You’re selling a home and you’re using the modern retirement mortgage to buy your next home. And then you’ve got this surplus of money oftentimes that you can invest however you choose. So it’s— it’s really, I don’t want to say radical, but it is— it’s a substantial tool that really makes a difference for people.

Dylan Silver (09:24)
A modern retirement mortgage. what is a— a modern retirement mortgage?

Mary Jo Lafaye (09:30)
So that’s something that I’ve actually created that refers to— it’s— it’s just kind of a— a overarching term that I use to refer to FHA’s Home Equity Conversion Mortgage. Mutual of Omaha has a proprietary jumbo reverse mortgage that allows people to access up to four million dollars of their home equity without making a monthly repayment of that loan until the last borrower moves, sells, or passes away. So it’s— it’s— it’s really a loan that for the most part goes in one direction to the borrower for a very long time without any obligation for repayment of the loan until they— the last borrower has permanently vacated the home. And of course, that assumes that they’re abiding by loan terms, which means someone’s occupying the home as a primary residence. They’re not using it as commercial property like Airbnb or turning their living room into an antique store. And they’re also paying their property charges on a timely basis. So that’s— that’s its really the key with these loans. the borrower has the responsibility to pay their property tax, homeowners insurance, maintenance, utilities. If they have an HOA, they have to pay that. If they have flood insurance, they don’t have to have earthquake insurance. But some people do. I find not very many people have that around here. It’s so expensive. But it’s just a matter of them kind of doing what they already have to do to be a homeowner, but not taking on a monthly mortgage payment. So as long as they— they pay their property charges, live in the home, take care of the home, you know, those are things everyone wants to do anyway.

Dylan Silver (11:17)
The natural question then is, well, when they move or, you know, if they pass away, what happens at that point?

Mary Jo Lafaye (11:26)
So when the last borrower has permanently vacated the home, let’s say they’ve moved in with family members or I have people in their 80s that get married and move in together. So any type of change where nobody’s gonna be living in the house, then the loan is due. If they pass away, if they’re able to live there the rest of their life, or let’s say they move to assisted living and they don’t come home for 12 consecutive months, then the loan is due. So if they just go to, you know, they fall and break a hip and go to rehab home for six or nine months, that’s fine. As long as they’re paying their property charges, the loan’s not due. But after the last borrower is out of the home for 12 consecutive months, or if they’ve moved in with family, that’s when the loan is due. And then the borrower or their estate, whoever’s in charge, has— they have to repay the loan. And they can do that through selling the home. And then paying off the mortgage and then all the rest of the money, including all the appreciation that has occurred, goes to the estate. And then, you know, maybe they leave it to their children or charities or however they’ve arranged that to happen. If the— if the estate wants to keep the home, maybe there’s a child that wants to keep the home, they can just refinance what’s owed and— and move in and then it’s their home. So the home stays in the borrower’s name. they can have it in a trust. We get the trust approved. Most trusts are approvable, some are not. I had a Q-tip trust I could not get approved, but a lot of even irrevocable trusts nowadays are approved. So that’s one of the first things we do. And then the estate decides how they want to pay back the loan. So some people just write a check for it for the loan that’s due.

Dylan Silver (13:09)
Now, for folks who are considering their options, are— are they, you know, hearing about this for the first time when they’re talking with you? Or have they heard, or are people generally aware that this is even an option for them, that they could take the equity in their home and not make payments until they move?

Mary Jo Lafaye (13:26)
Right. Yeah. That’s so— that’s an area where there’s actually a lot of— there are a lot of misconceptions about the loans that we offer. I’m a specialist. I’ve been specializing in these types of loans for 23 years. I’ve actually never done conventional lending. I love working with seniors and their families and their financial advisors. So it just— it just really is very fulfilling and kind of suits me. And it it’s something that most people think, “I have to sign my house over to the bank and my kids aren’t going to get anything.” What they don’t realize is that, you know, the loan usually starts out at just a fraction of the home value. So you have a small loan accruing interest, but you have a large home value appreciating. So especially in areas where there’s high appreciation, like what we call the parentheses—the east and west coast—those areas, homes tend to appreciate more rapidly. So that appreciation often covers or exceeds by far the interest that’s accruing on the loan. So people can have these loans sometimes for 10 or 20 years. And depending on the rate at which they spend the money and at the rate of appreciation that they are able to get from their home over the time they’re living in it, they may end up leaving a much larger amount of equity to their heirs. So every case is different. It’s impossible to predict the future. But that’s really the number one misconception, that people are surprised to know that, hey, you know, I’ve got a $2 million home and I’m borrowing $700,000. So $700,000 is accruing interest, but $2 million is appreciating. So, you know, those numbers when I actually show them the projections—and we use 4% appreciation for our projections, and we can also do it with 2% or 3%—they’re very surprised to see that they may have more appreci— more equity in five or ten years or even longer than they start out with. So it’s, you know, it’s— it’s always kind of like a light bulb goes off in their head, like, whoa. And— and I explained to them that keep in mind if you’re taking money from your home equity, that means you’re not taking that money from your investment accounts, right? And the returns on your stock portfolio are often a lot larger, higher than your interest charges. And that stock portfolio is compounding also. So when you really look at it as a balance sheet, even advisors are surprised when I show them the amortization and they work it into their— their overall projections. They’re kind of like— I have advisors tell me that have been in the business as financial advisors for 30 years and they say, “Why aren’t more people doing this?” I’m like, “Well, why haven’t you been doing it? Because you don’t know, you haven’t looked at the numbers.” So that’s my job is to get people to look at the numbers and to understand the money is going to come from somewhere. Do you want it to come from somewhere that’s taxable and reduces your earning power, or somewhere that’s not taxable and that you still get appreciation on the entire asset, no matter how much of it you spend? And that’s really the key.

Dylan Silver (16:33)
There— there’s a lot of people I think that are in this boat where they’re house rich, right, and and maybe cash poor. And they’re looking at, well, you know, how do I make Social Security stretch? And they’re looking at their investment accounts. Are their investment ad— advisors aware that this is an option for them?

Mary Jo Lafaye (16:51)
If they’ve attended one of my seminars or webinars or I’ve spoken at one of their national conferences, then they’re very aware. I, you know, I— I’m constantly trying to educate other professionals because they’re the ones advising my clients. So that’s always my first line is, you know, line of action is it educate the consumer, but also their advisors so that they can advise them more effectively. And so I do a lot of education. I’ve been doing it, you know, for 20 years. So it has make— made a dent. And there are other people also that take an educational approach. I’m not the only one out there. So it’s made a dent. But it’s, you know, people— they learn and they forget because it’s not something they’re looking at every day. They’re more focused on the accumulation of wealth, but really the distribution phase is at least as important as the accumulation phase. Because there’s so many variables, right? We don’t know how long we’re gonna live. We don’t know how much healthcare we’re gonna need in home care or a spouse’s care home. We don’t know what stock market returns are gonna be or what volatility will do to us. We don’t know the cost of living and what inflation will be. So there’s just so many variables. It’s literally retirement is all variables. The only thing we know is that we’re gonna get older every day, and everything else is a variable.

Dylan Silver (18:16)
When— when folks are navigating all of these variables that— that you mentioned, and they’re trying to determine, you know, “Do I stay in the home? Do I move, right?” Which product is right for me? Inevitably, there’s a lot of cooks in the kitchen, right, trying to help them make this decision. Are— are you finding in— in your work that you’re, you know, explaining this not just to them and their advisor, but also almost like their whole family at times?

Mary Jo Lafaye (18:41)
Yes, yes. I always invite— I say, “If you have any responsible adult children, you know, preferably the ones that— that— that have their best interest, the— the parents’ best interest at heart, let’s get them involved, you know.” And some people want to do that and some people don’t. Some people are very private. They say, “This is my business, and you know, the kids will get what’s left after I take care of my needs.” And a lot of time the— the kids feel that way, too. They’re like, “You know, we wanted mom and dad to take care of themselves,” and they’re just happy that they’re not gonna have to take care of mom and dad, socially, right? Because it’s— you’ve probably heard of the sandwich generation. People are— they’ve got a mortgage, they’re building a career, they’ve got kids in college, and now their parents need money. And that’s— that’s hard, right? So putting their parents in a position where they have access to that home equity liquidity, whether it means staying in their current home and getting a credit line that’s gonna grow every month for the rest of their life, or whether it means downsizing, right sizing, and putting some money back into their investment portfolio that might have been overdrawn from, that’s gonna also help the kids, right? Because that means mom and dad aren’t gonna have to move in with you, or maybe they’re gonna have money to pay for their own care instead of it being a burden on the rest of the family. So, and a lot of times my— my clients, they’re just not, you know, they’re not as financially savvy as their kids are. Getting their kids on board to really look at the numbers and evaluate it and understand that this this really is the best option. The lender’s not taking the house. You know, it’s it’s just a loan with deferred repayment that’s federally regulated. And in case of the S— in the case of the FHA loan, it’s federally insured. All these loans, by the way, are fully non-recourse, which is very unusual. it’s more common in California, but in most states, that is not a— a term that you hear in rela— in regards to— to mortgages. So that offers full protection to the borrower and their estate. They can never owe more than 95% of the home’s value, regardless of home’s values crashing, how long they live, how much they spend, if interest rates go up. No matter what, the kids can keep the house for 95% of the home value. Or if they’ve spent less than that, then they can keep it for, you know, whatever the loan balance is. So it’s really a very, very protected class of loans and the consumer— there are a lot of consumer protections.

Dylan Silver (21:11)
We are coming up on time here, Mary Jo. Anything you’d like to say directly to our audience?

Mary Jo Lafaye (21:17)
You know, just that if you’ve heard about reverse mortgages in the past, you probably need an update. And I’m happy to give a full, detailed and personalized proposal to anyone who requests it. I don’t charge for that. Mutual of Omaha pays me. So clients don’t pay me no matter how much time I spend with you, your family, your advisor, whether you’re wanting to stay in your current home or downsize or right size, anywhere in the country. I can help you really sit down and look at the numbers and evaluate them. I’ll work closely with your advisory team and your family, and I’ll try to find the most economical solution that meets your goals. So happy to work with anybody and love what I do and I’ve got a lot of resources if you need to do a 1031. You know, say you want to rent your house for a few years and then sell it in case you’ve got a big capital gain tax. So I’ve worked with people to do 1031s on their primary residence after renting them. And there’s all sorts of ways to really maximize how you can improve your nest egg for the rest of your life.

Dylan Silver (22:24)
Mary Jo, thank you so much for joining us today. Thanks for your time.