Money Magic by Laurence Kotlikoff

Author:Laurence Kotlikoff [KOTLIKOFF, LAURENCE J.]
Language: eng
Format: epub
Publisher: Little, Brown and Company
Published: 2022-01-04T00:00:00+00:00

If you have to move and your house’s value hasn’t kept up with the inflation rate underlying your HECM RM interest rate, you may find yourself handing over your house to the lender (think Sue) with no wherewithal to cover your ongoing housing expenses.

Leaseback: A Better Way to Free Up Home Equity

The easiest way to free up home equity is simply to sell your home and rent. Ideally, sell your home to your kids or another close relative and lease it back from them. Give them a good price in exchange for their not raising the rent faster than inflation. Or specify a formula under which the rent partially adjusts for increases in property taxes or nationwide rents. If you invest the proceeds in long-term TIPS, your home sale proceeds will be protected against inflation and can be used, in part, to pay your lease.

This arrangement can be legally formalized. As such, a leaseback can be organized with anyone, including a bank. Why the FHA hasn’t supported this straightforward solution beats me. Maybe the banks don’t want to have to deal with a plumbing leak at 11 p.m. on Sunday night or get into landlord-tenant disputes. This is where parents and children, who love each other, have an advantage. The mutual caring limits the scope for bad behavior, like skipping town without paying rent.

How does this solution differ from an RM? First, it releases essentially all your home equity. There are also no fees. Plus, you get to stay in your home as long as you want. And you’re not penalized if you need to move.

Buying into a continuing care retirement community is another way to free trapped equity. In this case, you’d sell your home and hand over a chunk of the proceeds to the facility plus pay a monthly fee in exchange for their agreement to provide you with housing, meals, entertainment, and transportation, as well as home-health and nursing care for the rest of your days. Such communities, because of their large numbers of residents, can provide better terms for their services than if each person were to purchase them separately. The reason is their services can be provided in the form of an annuity. Those who live long get the benefit of the up-front payments of those who die young.

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