Home Equity in Retirement Planning
Today, around 30% of homes in the US are owned free and clear; 17 million of that 30% are people over age 60. In this post-era of the housing crash, home ownership has decreased to 63% from 69%. However, that news is not necessarily bad! We have greatly rebounded in real estate values and are on a more sustainable home ownership trajectory. The American Dream is alive and well!
Living the American Dream means lifestyle preservation in retirement, and a well prepared financial plan is the only way to accomplish YOUR dream. That plan should expose ALL of your assets, the options with them, and why they would or would not be used. Many times, equity in your primary residence represents an over-weighted, illiquid asset class for a retiree. Because of that, many advisors look past your home in your financial plan. One of the least popular ways to tap equity in a home (due to a reduced lifestyle) is to sell the home and downsize.
Most are unwilling to make the necessary cuts when it comes down to it! A few valid reasons an advisor would steer clear of the home as a usable income producing asset is as follows: because clients want to pass their properties down to their children, or if long term care is needed outside of the home and the owner must move to a professional care facility.
When a client wants to maintain their residence during retirement, but needs or desires their cash equity in their home, either a home equity line of credit or a reverse mortgage is recommended. The home equity line of credit sounds good until you can’t afford the payment or the lender decides to reduce or close the credit line. Fortunately, at age 62 the government allows reverse mortgages to create additional retirement income or cash to home owners that have considerable equity in their homes. One option with a reverse mortgage (there are several fixed and variable income choices) that is arguably a strong solution is the reverse mortgage line of credit. Although it will have higher upfront costs versus a home equity line of credit, the value can grow marginally to offset the initial closing costs over time while it remains unused. The borrower can elect to make payments or NOT. Since the loan is insured by the government, the credit line cannot be closed or reduced if the property is owner occupied, maintained, and taxes and insurance are paid annually. So, you have the security of access when and if you need it. However, if the reverse mortgage line of credit remains unused, the property or the full value of the property will still be able to be passed to your heirs.
When our firm provides retirement planning, especially when making decisions with your primary residence, we consult with mortgage professionals, CPAs, and estate and elder law attorneys. Counseling is now required by the Consumer Financial Protection Bureau when executing a reverse mortgage. On a final note, just this month the mortgage insurance rates and equity values have changed on reverse mortgages. Those changes are viewed as more restrictive, but necessary to protect both the consumer and the tax payer to preserve the program.