Retirees’ Home Equity: Useful but Unused

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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. 

Wendy Weiss, MBA. Ph.D,

This is an important set of findings. The rationales for retaining a home are clearly the ones I have heard in my 20+ years as a financial advisor.

Aging in Place is trendy today. Will this pattern of home retention continue? Is it more prevalent among the relatively wealthy? (They are the ones that make up my “book.”) Will it change if the stock market stops breaking records each month? Will it change if inflation pushes property taxes up a lot more?

I am mindful of the fact that 50% of retirees receive 50% or more of their income from Social Security. Is that the cohort that sells their homes to move to less expensive ones?

I hope future research has the funding to break this down by quintiles, and offer additional answers to these and related questions. Or, economists, and financial advisors stop thinking that people act completely rationally when they make money decisions.

With the greatest respect for your work.

Chuck Miller

Many calculators of assets available in retirement totally skip home equity.

A better solution for some may be a regular home equity line of credit. It gives more flexibility than a reverse mortgage and usually has lower fees.

    Jim Warns

    Chuck –
    Other than a lower up-front cost, a “regular home equity line of credit” (HELOC) has significant drawbacks for a retiree on a fixed income compared to a reverse line of credit…

    1. A HELOC is subject to suspension, reduction and/or cancellation by the lender; RM LOC is not.
    2. A HELOC has a defined draw period, after which further access to the line is suspended and payments only are required; RM LOC does not.
    3. A HELOC has required monthly payments; RM LOC does not.
    4. Only the principal portion of any payments made on a HELOC are credited back to the available line; RM LOC payments are credited back to the available line dollar-for-dollar.
    5. A HELOC can not be set up for scheduled monthly disbursements; a RM LOC can.
    6. A HELOC is full recourse; a RM LOC is non-recourse.
    7. A HELOC has a static line of credit that is subject to reduction in the event of declining home value; a RM LOC has guaranteed growth in the available line which is independent of home value.

    Review the above and then ask yourself, which has more flexibility and would better serve the needs of a retiree?

      Dave Gardner

      Citi suspended all HELOC applications in March, followed by Chase and Wells Fargo. They cited uncertainty about the economic recovery and impact to individuals and businesses. This pandemic is far from over.

Dave Gardner

A change in health status is among the most likely events to pull you out of your home. If aging in place is the goal, a reverse mortgage could be paired with adequate long-term care insurance.

My understanding is some years ago, Congress approved a “HECM Lite” with reduced fees specifically with this in mind. For whatever reason, the regulations were never written and product development abandoned. Perhaps it is time to revisit this idea.

Michael Waggoner

For older people to rent space in their homes helps solve our housing crisis.

However, to keep people in homes they cannot afford is a questionable use of tax funds. Unsubsidized, those people are likely to sell their homes or rent them out to cover their living expenses (so new people will be using the home), and in each case the equity helps to support the older people.

A home where one family was raised can be used by another generation family. To subsidize that home as an empty nest hurts the young trying to raise families.

Shelley Giordano

Curious to hear how a HELOC is “more flexible” than a HECM Line of Credit? A HECM Line of Credit has no maturity term, no requirement for a particular payment during the loan’s life, can be paid down and reused, grows in borrowing power even if the house depreciates, and cannot be cancelled, frozen or reduced by the lender.

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