Updated May, 2021 — (Originally published October 6, 2014) — According to the EBRI 80%% of retirees are very or somewhat confident about their ability to live comfortably in retirement. Even though that is a much higher confidence level than it was in 2014 (55%), that still leaves a lot of people worried, most of whom have very little savings and no pension to fall back on.
There is good news though
Fortunately, even if you have minimal retirement savings and no pension other than Social Security, all is not lost. You probably have a retirement piggy bank that you never even thought about – your home! Indeed for most people, the value of their homes is greater than all their other assets combined. Prices have jumped in the last year, which means that if you are willing to rent or downsize, you might have more equity than you realized.
My home is a plus, you scoff?
After all, housing expenses consume more than half of the household income of 1 in 3 Americans over 50, according to a study by Harvard’s Joint Center for Housing Studies and the AARP. The average person over 65 spends 30% of their income on housing. While the fact that your home is a financial burden is probably true, it doesn’t have to be that way.
Your home has the ability to boost your sources of income in 3 ways:
1. Downsize and keep the money. Chances are you live in a home that is larger and fancier than you need. You might live in a area where home prices have risen tremendously since you bought it. You can easily increase your retirement assets by downsizing to a more reasonably sized home in a less expensive area. That might mean moving to a state with lower real estate values, such as the midwest, south, or away from big cities. Or it just might mean selling and buying a smaller, more age-appropriate home near where you live now. Bottom line – when you sell your home and buy one for less, you can use the difference as income to help fund your retirement.
2. Sell and reduce your expenses. Selling your existing home can also help you is on the income side. That’s because if you have a smaller, less valuable home you will pay lower property taxes, even if you don’t add more leverage by moving to a location with lower property tax rates. You will lso save money on maintenance, heating and cooling, insurance, and utilities. To loosely paraphrase Ben Franklin, the money you save can make up for the money you don’t have. In fact, The Center for Retirement Research estimates that downsizing from a $250,000 house to a $150,000 house could add $6,250 to what you have to spend in retirement.The sooner you do this, the better off you will be.
3. Get a reverse mortgage. Yes, reverse mortgages have a bad press – some of it self-inflicted by irresponsible borrowers and some by over-zealous lenders. New regulations are helping to protect consumers from themselves and from the the unscrupulous. These days if you qualify for a reverse mortgage, (almost all of which are federally guaranteed Home Equity Conversion Mortgages, referred to as HECMs), you shouldn’t have to worry. The basic idea is fairly simple: you can tap the equity in your home as a source of cash, income, or even to help buy your retirement home. Instead of paying money in, you can take it out. And just like with a regular mortgage, your home secures the deal.
The Boston College Center for Retirement Research has an excellent pdf document explaining the various ways that you can use your home to finance your retirement. We recommend you read it, as it filled with helpful illustrations and answers many of the questions you will have Using Your Home to Pay for Retirement.
Details about reverse mortgages
Specialist companies make most reverse mortgages, so you probably won’t be going down to your local bank to apply for one. Many bigger lenders left the business, but now that early abuses have been corrected, are re-entering the market. The most common loans are widely known as HECM loans, which are backed by the Federal Housing Administration. Borrowers must be 62 or older to qualify. Rules for these loans have been tightened since many earlier abuses caused problems. To qualify you must have significant amounts of equity in your home and a good credit rating. If you qualify you can generally take out 60% of the available equity in the house in the first year, and the remainder in subsequent years You must use the money to pay off any existing mortgage first. You are also responsible for paying for the upkeep of your home as well as property taxes and insurance, or face default. As long as you meet those obligations, you can stay in your home as long as you live, and never owe more than your equity (if you use up all of your equity the bank owns the home entirely). A reverse mortgage is essentially a loan, and as such you are required to meet certain obligations.
If you qualify for a HECM you can take out the money from your home in 3 ways: as a lump sum, as a line of credit for future use, or as a monthly payment (basically an annuity). You still own your home, but it is collateral for your loan. Usually, once you die your home becomes the property of the bank. Your equity is reduced by any amount borrowed, plus interest. Regulations now require that you meet with a counselor approved by the government before taking a reverse mortgage.
There are a number of important advantages with a reverse mortgage, particularly for people who have significant equity in their home but need money for another purpose such as buying a retirement home, medical, or living expenses.:
– You can use the money to pay off an existing mortgage
– The money is tax free, since it is a loan
– Use the money as a down payment or even purchase a more retirement-friendly home
– Update your home to be more appropriate for your age
– Pay off unexpected expenses, such as medical, that you don’t have the money for
– Create a monthly income stream to fund your retirement
– You never owe more than your equity
– Use the line of credit to avoid having to sell investments in a down cycle.
HECMs do seem to be gaining in popularity. As one example, We know of a number of active adult developments where the majority of buyers are using HECMs on their existing homes to finance their new purchases.
Reverse mortgages are clearly not for everyone. Earlier abuses highlighted significant problems with reverse mortgages, giving the industry a bad name and consumers a sour taste. Future changes to protect consumers against predator lenders and their own mistakes are coming too. One of those might be to require borrowers to set aside money for future maintenance, etc. Here are some of the disadvantages of a reverse mortgage:
– When given to unqualified people they can result in the loss of their home and all of their equity
– Failure to maintain the property and pay property taxes can have the same result
– Many people have taken lump sum distributions early in the loan and then spent the money unwisely. So instead of having the money to finance the rest of their retirement, they lost their homes when they were unable to keep them maintained, insured, and current on property taxes.
– There have been instances where one person in the couple was listed on the loan. Then when that person died, the home was foreclosed on, leaving the survivor without a home. As long as all owners are on the loan, they can stay upon the death of the first spouse.- One of the biggest reasons why more people don’t take out reverse mortgages is the loss of equity. It seems there is a natural urge to pass our assets down to the next generation. But if the bank owns your home when you die, that source of inheritance disappears.
– There are fees associated with setting up a reverse mortgage, which does add to the cost. Typical fees on a $250,000 home are $8,250, or 3.3% of the home’s value. Make sure you understand what those are.
You also have to continue to live in your home or the loan could be called. Sometimes health issues make that happen. Investopedia has many articles about the advantages and disadvantages of reverse mortgages; here is one on the downsides.
More about HECM for purchase programs
We asked 2 of Topretirements advertisers to quote about their experience with HECM mortgages.
In 2014 Frank Curran, CEO of The Fairways at Savannah Quarters said: “We have sold 10-12 homes with this product. What we find is it is an alternative to other financing that is appealing to buyers since they can retain more of their cash if they are a cash buyer or if a conventional buyer they appreciate the fact that they do not need to make a cash monthly mortgage payment. I sell these homes for the most part to those who are at least envisioning this is their last home.”
Jeffrey Fricke, who specializes in helping individuals get HECM mortages commented back then: “New regulations have definitely made HECMs safer and more attractive to seniors. The Financial Advisor community took the position that the reverse mortgage was a option of last resort but they now suggest retirees should investigate the reverse mortgage as early as possible and let the Line of Credit (LOC) start to grow and use this tax free money to supplement their retirement as well as protection during bear markets.”
Chances are your home is your biggest asset, dwarfing your other investments. Assuming you are one of the many retirees who are worried about how you are going to fund your retirement, you would be foolish not to consider tapping that equity. A simple approach is to downsize to a less expensive, more efficient home, giving you extra cash and cutting your expenses. But if you want to stay in your home or finance a more less expensive home for retirement, you might consider a reverse mortgage like a HECM.
Financial decisions, especially a big one like a reverse mortgage, can have a huge and sometimes devastating effect on your lifestyle if made poorly.. So before you make any big move, carefully consider it and discuss it with your family and professional advisors.
Comments? What are your thoughts about using your home equity to help finance your retirement lifestyle? Please share your ideas, and your reasons why, in the Comments section below.
For further reading:
HUD.gov FHA page on HECMs
The Facts about Reverse Mortgages
NY Times: Love Them or Love Them. Reverse Mortgages Have a Place
Boston College Center for Retirement Research: Using Your Home to Pay for Retirement
MarketWatch: Housing is Biggest Expense for Retirees
Retirement Downsizing Checklist
Reverse Mortgages Costing the Unwary Their Homes (0lder article)