Using Home Equity in Retirement


The federal government is trying to make life a little easier for seniors by trimming fees on reverse mortgages, a way of converting home equity into cash.

But that raises a broader question: Where does your home equity fit into your retirement plans?

Home equity is the difference between the home’s current market value and any remaining debt on the property, such as a mortgage or home equity loan. While many people who took out new mortgages a few years ago are “underwater,” owing more than their homes are worth, many millions of people are not. In fact, many older homeowners have paid off their mortgages.

For them, equity is equal to market value, and even if home prices have fallen there may be hundreds of thousands of dollars tied up in the home — money that could help with living expenses.

Most financial advisers have said that home equity should be the last source of wealth tapped in retirement, coming after Social Security, pension and investments.

There’s a simple reason for that strategy: You’ll always need a place to live. The home you own is a hedge against volatility in the housing market. If prices rise, your home’s value should keep pace with the prices of homes you’d consider moving into later.

Because you’re likely to need the equity in your current home to buy your next one, equity can’t really provide spending money until you are ready to downsize, or move to a cheaper place.

Many younger homeowners take out home equity loans to get at money in the home. But this can be difficult for a retiree because the lender requires sufficient income to make the loan payments. It’s hard to come out ahead on a home equity loan because you have to pay it back, with interest.

That’s why the reverse mortgage can be such a life saver. You borrow against the value in the home but make no loan payments. Instead, the interest charges are added to your debt, which is paid off after you sell or die. The lender is not allowed to demand payment earlier.

That, of course, creates a lot of risk for the lender. The longer you keep the home, the harder it will be for the lender to sell it for enough to cover your ever-growing debt. To minimize this risk, lenders restrict the amount that can be borrowed. A 62-year-old can get much less than an 80-year-old, who’s not likely to have the loan as long.

So, even if a reverse mortgage looks like an appealing way to fund your retirement, it’s best to hold off as long as possible.

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