Merrill Lynch Proves Clueless on Use of Home Equity in Retirement

The venerable Merrill Lynch, a subsidiary of Bank of America since 2009, has published their opinion and advice related to why and how retirees should use their home equity to improve their financial picture in retirement.  And for that they should be complemented.

The topic is an extremely important one, with literally millions of baby-boomers reaching retirement age each year in this country… a trend that will continue over the next 15 years… and considering that millions will be attempting to do so with mortgage debt and with most of their net worth invested in their homes.

It’s not a pretty picture when you consider that retirement today is measured in decades, not years… and with the cost of medical care having skyrocketed to impossible levels, etc. etc.  So, I was happy to see Merrill Lynch coming out with an advisory piece discussing the topic of home equity and how it can be used to improve one’s ability to enjoy a comfortable retirement.

Imagine my disappointment when I read what the retirement experts at Merrill had to say… or rather, what they neglected to say.  It’s not that they said anything that was factually incorrect, in fact, many of their points were excellent and very well written.  My problem is with the important issues and alternatives that they failed to mention.

And the question I can’t help asking is: Do they know what they left out and omitted it intentionally?  Or are they oblivious, having no idea what they didn’t do, much less why it matters.  The point is that they started on the right track, but by failing to address several critical issues and ignoring the alternatives, they ended up providing less than good advice.  It’s really a shame and something had to be said about it.

Good beginnings…

So, Merrill’s advisory piece starts out perfectly.  It’s titled: “Could Your Home Help Fund Your Retirement?”  There’s no date on the piece, but the copyright notice reads 2019, and one of the sources cited in the footnotes is from June 2019… so it had to have been published recently.

Under the headline it says: “Many people live in their most valuable asset.  Here’s how your home’s value could help you retire on your terms.”  Okay, it’s not the best headline I’ve ever read, but I’m not here to make style points.  So. so far, so good, right?

Then it continues…

“FOR THOSE NEARING RETIREMENT, few questions loom larger than whether to sell or keep the family home.”  It goes on to point out that it’s an emotional decision that also has “major financial implications,” and that it could lead to “significant savings.”

Then it offers some important facts, like… “Today, the average 65 year-old has 47% more mortgage debt than 65 year-olds had in 2003, according to the Federal Reserve Bank of New York.”  And then, Debra Greenberg, the director of Retirement and Personal Wealth Solutions at Bank of America is quoted…

“The equity you’ve built up could be one of your most valuable retirement assets.  That’s why it’s essential to carefully think through the role it will play in your finances after you retire.  How much equity you have and whether your mortgage is paid off, as well as the strength of the housing market in your area are all things worth considering as you figure out how your home can help you live the life you’ve always wanted in retirement.”  All good points, right?

Then, the advice begins,: “Here’s how to factor your home’s value into your planning.” 

Idea #1: Sell Your House.

Merrill’s first insight is that you could sell your house and downsize into something less expensive or move somewhere offering lower cost of living.

That’s all true, of course, but it’s not “news,” is it?  I think pretty much everyone that has owned a home long enough to have built up significant equity knows that one option in retirement is to sell it and move somewhere cheaper, while putting some portion of the proceeds from the sale into savings for the future.  It makes sense, if that’s what you want to do, but it doesn’t always work out that way.

The biggest problem with selling your home is that you’ll have to live somewhere and that somewhere may not be less expensive enough to make moving worth it.  Let’s just say that you sold your home for $700,000 and after paying off a $200,000 mortgage, sales commissions and moving costs you walked away with $450,000.  The question then is: Where would you move for less than $450,000?

If you find that buying and moving into the next house would cost at least $450,000, you’ll probably decide it makes more sense to stay where you are, which means your equity remains locked up in your home and therefore not contributing to your retirement savings.

Of course, you’ll also have to consider the property taxes and whether you’ll have capital gains to pay on the sale, and Merrill correctly explains that generally speaking, capital gains taxes “don’t apply to the first $250,000 of capital gains for an individual and $500,000 for a married couple on your primary residence if you’ve lived in it for two of the past five years.

The other question is… do you want to move somewhere else?  Even if it will be financially advantageous?  Obviously, some say yes… and others, no.  I happen to know one retiring couple who moved from Southern California to rural Virginia.  They sold their home for over $600,000 and moved into one that only cost $170,000.  But, it should come as no surprise that not everyone is ready to leave Southern California for a life in rural Virginia.

Not surprisingly, Merrill also talks about investing money left over after you sell your home in things like stocks and bonds, which they remind you, can go up… or down.  I hope that everyone knows that reality all too well.

Idea #2: Stay Put and Get a HELOC.

Th next option Merrill discusses is staying put.  Keeping the home that you’ve lived in for years and paying off your mortgage.

Obviously, paying off your mortgage would mean lower monthly bills, since you wouldn’t have a monthly mortgage payment.  However, it wouldn’t mean adding any cash to your retirement savings.  Once you’ve paid off your home, Merrill suggests that you open a Home Equity Line of Credit (HELOC) to use in case you need money for some significant expense, such as medical bills or to remodel your home.

Merrill points out that using a HELOC to pay for various expenses in retirement means that you can “leave your retirement savings in place while you address your current needs.”

That’s certainly good for Merrill Lynch, I understand.  Merrill doesn’t want people taking money out of their 401(k)s and IRAs because Merrill makes money on those balances every year.  And, if you run out of money in those retirement accounts, you won’t need Merrill anymore, so they certainly wouldn’t want that, so… yeah… according to Merrill Lynch, don’t take money out of your retirement account being managed by Merrill Lynch… borrow it somewhere else instead.

That advice from Merrill is self-serving, just like telling you to sell your home and invest any extra cash was, but beyond that, it’s also just terrible advice for a whole host of reasons that Merrill fails to mention… but I will.

So, that’s as far as Merrill Lynch’s advice on using home equity to improve your financial picture in retirement goes.  Either move somewhere less expensive, while investing any extra money with Merrill Lynch, of course, or pay off your home and borrow money from a HELOC when you need it, so you don’t have to take money out of your retirement accounts… which presumably are being managed by Merrill Lynch, of course.

That’s it?  Those are my only options?  There’s nothing else I should consider related to using the equity in my home to help me maintain my lifestyle in my retirement years?  Nothing?

Nonsense.  Not only are there several other things to consider and potential ways to go that Merrill fails to acknowledge or mention, but some of what Merrill says in this advisory bulletin is just terrible advice no matter how you slice it.  Here’s why…

HELOCs are not for retirees.  Never were, never will be.

HELOCs are lines of credit that banks make available to people with very good credit and significant equity in their homes.  If your home is worth $500,000 and you own it free and clear, assuming your credit score is high enough, you’d probably be able to get a $100,000 line of credit by opening a HELOC.

The problems with HELOCs start when retirees use that money.

First of all, HELOCs require borrowers to make interest only payments for 10 years, after which time the loan is re-amortized for the remaining 20 years, which means that after the first 1`0 years, the payments will increase to include both principal and interest.  That means that your payments that were $500 a month could jump up to $1500 a month after 10 years.

HELOCs are designed for younger people… people who are still working.  Let’s say you’re 45 or 55 and you take out a HELOC to remodel your home.  You borrow $100,000 to pay for the remodeling and make your interest only payments for 10 years.

Well, presumably, between 55 and 65 your income will increase as will your home’s value, so the idea is that in 10 years when your payments increase, you’ll be able to refinance the loan in order to pay it off.  Your income has gone up and the home is worth more so you shouldn’t have too much trouble refinancing your mortgage at that point and in doing so paying off your HELOC.

Of course, it doesn’t always work out that way.  Maybe your income went down or maybe the home’s value didn’t increase as you thought it would and therefore you can’t refinance and are stuck having to make the higher payments each month.  Or, maybe your credit score went down for some reason and that stops you from being able to refinance.

But retirees don’t see their incomes increase between 65 and 75, in fact the reverse is true in almost every instance, so after their HELOC payments jump up after year 10, chances are they won’t be able to refinance… and now they’re forced to pay more each month at 75 years old.

They refer to this situation with HELOCs as “payment shock” and it has caused more foreclosures than I can count.  HELOCs are simply a terrible idea for most retirees.  You can open one and put it away for a rainy day, but don’t actually use the money available or you’ll put your home and future financial security at risk.

HELOCs can also be cancelled unilaterally by the bank… at any time.

That’s right.  The bank that gives you your HELOC is free to cancel your HELOC at any time and for any reason.  It’s just like a credit card; the bank can decide that you’re too risky and either cut your credit line or cancel it without anything more than a letter notifying you that your credit line is no longer available.

And when do you think banks are most likely to cancel your HELOC line of credit?  The answer is, when you need that line most.  Remember 2009?  That year, untold thousands found out the hard way that their HELOCs, which they had intended to have for emergencies, went away as soon as they had emergencies. And if something isn’t guaranteed to be there when you need it… then what’s the point?

In my humble opinion, HELOCs should come with a warning label and even then, only be available to those under age 62.  Maybe something like this:

WARNING: “This loan requires monthly payments without fail and borrowers should expect those payments to increase significantly after 10 years of paying interest only on their loans.  You may not be able to refinance the balance after 10 years, and no one should take this loan if that’s their expectation. These loans can cause foreclosure especially when used by retirees.”

Think we’ll ever see such a warning label on HELOCs?  Not a chance.  Too many banks offer them and make money by doing so.

What Merrill Lynch either left out… or just doesn’t know.

I’m not going to accuse Merrill Lynch of intentionally misleading older Americans about their options related to home equity in retirement… but that’s exactly what they did by publishing their advisory.  What they did is the equivalent of writing something that advises veterans to buy homes, but neglects to mention a VA mortgage.  Or, like telling young couples to buy their first homes, without mentioning FHA mortgages.

What Merrill Lynch left out of the discussion about using home equity in retirement is the government’s HECM program, a program that most people know as a reverse mortgage.  Is it a coincidence that HECMs aren’t offered by Bank of America?  Lord, I hope that’s not true, but I can’t help but think that it is.

Here’s a list of reasons why Merrill should have mentioned the HECM…

  • HECMs are designed specifically for homeowners over age 62 and especially for retirees. HELOCs most certainly are not.
  • HECMs don’t require homeowners to make monthly payments of principal or interest. HELOCs most certainly do.
  • HECM lines of credit can never be cancelled. HELOCs, on the other hand, can be cancelled by the bank at any time the bank chooses and for any reason.
  • HECMs don’t require retirees to qualify based on credit scores. HELOCs always do.
  • HECM lines of credit are guaranteed to increase each year, regardless of the home’s value. HELOCs never increase without requalifying based on credit score and current home value.
  • HELOCs require interest only payments each month, but after 10 years they are re-amortized, which makes monthly payments increase. That never happens with a HECM.
  • HELOCs can end in foreclosure when monthly mortgage payments can’t be made. With a HECM, you do have to pay taxes on the home, required insurance, and if applicable, Home Owner Association (HOA) dues and assessments, but you do not have to make monthly mortgage payments of principal or interest. Since HECMs never require principal or interest payments, you can’t lose your home because you can’t make monthly payments.
  • HELOCs require monthly payments so that means missing a payment will show up on your credit report, lowering your credit score. With a HECM, that can’t happen.

As a result, it should be clear that HECMs are simply better for retirees, period… and yet Merrill Lynch, even when talking about using home equity in retirement, fails to mention the HECM.

Why?  I’m not sure, but I can take a guess or two.

  1. The Stigma

HECM stands for Home Equity Conversion Mortgage, and it’s a mortgage program that was created by Congress, is regulated by HUD and whose loans are insured by the FHA.  There’s absolutely nothing wrong with HECM mortgages, but many people think that they’re only for people who are “strapped for cash,” because they are also referred to as “reverse mortgages.”

The term “reverse mortgage” means that no principal or interest payments on the loan are required, but that doesn’t mean you can’t make payments whenever you want to… you can choose to make interest only payments or principal and interest payments anytime you want to do so.

The obvious advantage for retirees is that no monthly mortgage payments are ever required.  With a HECM, you are only required to pay your property taxes and insurance and you can live in the house for the rest of your life.

That’s a huge advantage.  With a HELOC, should you need $100,000, you’d have to start making interest only payments immediately, but with a HECM line of credit, you could get the $100,000, but never have to make a payment on the loan… until you die or sell the home.

Since the interest rates on a HELOC and a HECM line of credit are similar, why wouldn’t anyone prefer a loan that doesn’t require monthly payments over one that does?

And still, the HECM and other reverse mortgages have a stigma… many people don’t understand how they work or how they can be used… many people still believe that with a reverse mortgage the bank will own their home, which is NOT TRUE.  But, maybe it’s that stigma that drove Merrill not to mention them.

  1. They Just Don’t Know?

Believe it or not, it’s entirely possible that the folks at Merrill Lynch who wrote the advisory bulletin just didn’t know enough about the HECM to mention it.  I know that might sound crazy, but the HECM is widely misunderstood. So, there’s a real possibility that Merrill’s people didn’t know what they didn’t know.

I’ve personally interviewed hundreds of financial advisors from all over the country, and I’ve been shocked at how few have any knowledge of, or even basic understanding of the advantages that only HECMs offer retirees… and the media has been no help.  We continue to see stories in the press about reverse mortgages as being somehow bad or risky when that’s simply not true.

Not when compared with any other type of mortgage anyway.

I mean, let’s face it… homeownership itself is risky. It’s risky to buy and own a home.  Renting is less risk, right?  You don’t have mortgage payments for 30 years, you don’t have to pay the property taxes or fix the roof, for that matter.  Of course, your landlord might jack up your rent or sell the place out from under you… so maybe it’s life that’s what’s truly risky here.

While it’s true that with a HECM you are required to pay your property taxes… that’s true whether you have a HECM or you don’t.  Even if you owe nothing on your home, you still must pay your property taxes, right?

HECMs and other reverse mortgages are just FHA insured mortgages.  There’s nothing scary or risky about them… in fact, I’d say that they’re considerably less risky than HELOCs simply because with a HECM, although you can make payments whenever you want to make them… you never have to.

  1. Bank of America Doesn’t Offer Them?

This is the most cynical explanation… the idea that Merrill Lynch’s advisory didn’t mention the HECM alternative because today, parent company, Bank of America doesn’t offer HECMs, but they do offer HELOCs.

I hate to think that’s the answer to why Merrill failed to mention the HECM as an alternative for older homeowners, but I suppose it’s possible.  Personally, I think we all should have learned watching the holiday movie, “Miracle on 34th Street,” that Macy’s should tell you where to buy what you’re looking for even if it’s offered by a competitor down the street.

Again, I hope this isn’t the case, but I guess it’s a possibility.

In Conclusion…

Retirement today is harder than ever before, there’s no question about that.  Not only are we living longer than ever before, but today things like health care cost a whole lot more than they did in the past and gone are the days when most people were able to rely on defined benefit pension plans to get through their retirement years.

In addition, our zero or low interest rate environment certainly isn’t helping.  While it used to be that retirees could deposit $100,000 into a CD at their local bank and expect to earn maybe 6-8% on that money, not so today or at anytime in recent memory.  Today, a 12-month CD pays 2% if you’re lucky and if inflation runs between 2-3%, you’re breaking even at best.

The point is the retiring today is scary and many people will want and/or need to access the equity in their homes in their retirement years to maintain their chosen lifestyles.  Merrill Lynch is absolutely right about that.  The question is how should they do it.

One way is to sell the family home and move somewhere less expensive, a choice Merrill mentions.  But, even when selling your home to downsize or move somewhere less expensive, you should consider using the HECM-for-Purchase or H4P for short… another program designed specifically for those over age 62.

With a H4P mortgage, you basically put 50% down on your new home and then you never have to make a monthly payment on the balance.  Of course, you can choose to make payments whenever you want to, but you never have to.

For example, if you sold your home for $500,000, you could buy the next home by putting $250,000 down and then not have to make a monthly payment for as long as you live in that home as your primary residence.  And that means you could take the other $250,000, that you received when you sold your home, into your own bank account instead of anywhere else.

But, Merrill Lynch doesn’t mention that alternative either, even though it’s a mortgage program specifically designed for retirees.  (For more on the H4P, click here: “The Single Best Tool for Downsizing is Called HECM-for-Purchase.”)

It used to be that the goal was to pay off one’s mortgage before retiring.  Today, however, that’s not the best advice for most people because once they’ve paid off those mortgages they may not be able to access the equity without selling the home.

You see, although back in 2006 it was easy for anyone to access their equity at almost any time, today that is not the case.  Today, you’ll need to qualify based on your income… your ability to repay… and that may not be possible once you’ve stopped working.  When you consider that you could live 30 years without income, it’s probably a good idea to hold onto your cash for as long as possible.

The overriding point here is that the HECM program and other reverse mortgages are specifically designed for retirees looking to access their home’s equity.  There are many reasons people use them, but the point is that ANY discussion about accessing home equity in retirement should include a discussion about HECMs and other reverse mortgages.  Period.

For Merrill Lynch not to mention the HECM alternative in an advisory bulletin about accessing home equity in retirement makes that bulletin incomplete at best… and bad advice, at worst.


Mandelman out.

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