As older homeowners struggle to find new sources of retirement income, growing numbers are starting to tap their housing wealth by using home-equity loans or reverse mortgages. A new report from MetLife Mature Market Institute calls for a more comprehensive approach to ensure that this asset is used appropriately and effectively to deal with the growing uncertainties of retirement.
“There is no doubt that Americans should be more strategic about using home equity,” said Sandra Timmermann, Ed.D, director of the MetLife Mature Market Institute. “Retirees need a new framework for thinking about how home equity can help assure their financial security and enable them to age in place without fear of running out of money.”
Tapping Home Equity in Retirement was released jointly with the National Council on Aging and found that 35% of older Americans see their homes not just as secure places to live, but also as collateral for a loan. About 14% are taking cash out of their house through a home equity loan or reverse mortgage. “Tapping home equity in a timely and appropriate way can keep small budget shortfalls from becoming overwhelming problems,” said Barbara R. Stucki, Ph.D., director of the Reverse Mortgage Initiative for NCOA.
The study highlights different options for using home equity that are not part of the current national conversation. These include:
- The use of reverse mortgages to delay the age at which one might begin to collect Social Security, thus increasing the amount of one’s ultimate monthly Social Security income.
- Reverse mortgages as a stopgap measure to consolidate credit card debt, to cover investment losses or to defer mortgage payments.
- Periodic distributions that would tap home equity to help people meet expenses if they outlive their savings/retirement income.
- Programs that combine public benefits with modest amounts drawn from home equity to help seniors stay at home.
- Home equity lines of credit for emergency spending, such as home maintenance, without which many homes decay and lose value.
- Reverse mortgages with a line of credit option for borrowers to pay out-of-pocket health and home care expenses. Borrowers only pay the amount they use from the loan.
“Our research on Baby Boomers indicates that they are more open than previous generations to tapping home equity and considering reverse mortgages to help fund their retirement,” said Timmermann. “With the right guidance and policy protection, reverse mortgages can be an important financial option for Boomers who do not have adequate savings.”
The report emphasizes that consumer education must be part of any new efforts aimed at increasing the use of reverse mortgages. It reinforces the value of consumer counseling mandated by the U.S. Department of Housing and Urban Development for the popular Home Equity Conversion Mortgage (HECM) reverse mortgage program.
“The financial services industry, policymakers, and consumer advocates cannot be complacent about the potential benefits and risks of using home equity to address the challenges facing older Americans,” said Stucki. “We need to work together to educate consumers, create cost-effective financial products, and promote public policies that strengthen consumer protections for older homeowners.”
The report also found that over half of boomers at 62 might consider a reverse mortgage to fund long term care (see chart below).
