Retirees’ Home Equity: Useful but Unused

Many older Americans could benefit from using home equity for some much-needed income in retirement. But they have found many reasons not to.

Some want to preserve that housing wealth for their kids. Others don’t like the idea of cashing in on the equity if it means relocating to a smaller house or apartment or a less expensive neighborhood. They also have plenty of concerns about federally insured reverse mortgages, which are a way to extract equity but are complicated to understand.

These doubts, expressed in readers’ comments on recent articles, are persistent. But economists see things differently: home equity has great potential to ease retirees’ financial problems – after all, roughly $8 trillion of wealth is locked up in older people’s houses.

K. Friesen is a rare reader who agrees. She said a couple women in her family are proof of the benefits of deploying home equity. Thanks to a reverse mortgage, her aunt had “a roof over her head until she died at age 97,” Friesen wrote in a comment posted to “Tapping Home Equity – Retirees’ Relief Valve.” The article described a study demonstrating that using home equity is effective in reducing financial hardship.

Now Friesen’s mother has a reverse mortgage. “If she can squeeze every dime out of the little she has to have a better quality of life, I’m all for it.”

The advantage of reverse mortgages is that they don’t have to be paid back before the homeowner dies – the catch is that the borrower must continue to live in the house. A potential downside, as a reader noted, is that if a retiree has to sell the house and pay the loan back, the balance and accrued interest will have depleted equity.

But in fact, selling in retirement is an unlikely scenario. Nearly three out of four older workers either don’t move out of their current home or, when they retire, they sell their house, buy a new one, and stay put, according to research featured in “Most Older Americans Age in their Homes.”

Granted, these homeowners tend to be healthier than the older people who move around more. But Paul Brustowicz said even retirees who have health issues want the same thing as everyone else: to age in their own homes.

“They love their homes, community and friendship,” he said. “This is the fourth and probably final house we will own. Unless I win a lottery jackpot, I’m staying put.”

Staying put – without taking out a reverse mortgage – often dovetails with the high priority placed on helping out adult children. For people who don’t have a lot of financial wealth, leaving the house in the will is a deliberate strategy, according to a study in the article “Retirees Intent on Leaving Homes to Kids.”

While extracting equity could be a viable way to get more income, few retirees are convinced they should do it. Only about 42,000 federal insured Home Equity Conversion Mortgages (HECMs) were sold in 2020.

Some readers said they don’t like reverse mortgages because of their myriad high fees. And despite the requirement that borrowers consult a federally approved financial counselor before taking out a HECM loan, some readers still distrust the unconventional products, which are more complicated than standard mortgages.

Another obstacle confronts people who have spent decades paying off a mortgage. They’re not always keen to borrow again after reaching that mortgage-free milestone. But, again, homeowners who stay in the house don’t have to pay back the loan.

And so the wealth – needed, but unused – remains locked up in retirees’ houses.

The research reported herein was derived in whole or in part from research activities performed pursuant to grants from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.