There’s a lot of money tied up in people’s homes. However, those who need to tap it the most may have the most difficulty doing so.
Paying off a mortgage is a form of forced saving. If you want to stay in your home, you have no choice but to make every single payment. According to the Federal Reserve, that money — plus home appreciation — now totals $31.8 trillion for all households, more than three times as much as in 2012.
However, retirement provision is not absolutely necessary. As a result, some homeowners end up with a lot of home equity but little retirement savings.
Here lies the problem with this situation. Setting up a retirement account is relatively easy and quick. Home equity? Not as much.
The most obvious way to get this equity is to sell your property. But for some older homeowners, that may not be an option.
Maybe your home is exactly the way you like it because you built it that way or renovated it for decades. If you are tied to local doctors or a place of worship, it is difficult to disconnect and move away. Clearing out years of belongings is a real pain. And a suitable and affordable new space – no steps, minimal maintenance – may simply not exist wherever you want to be.
And there is the money. If you have a mortgage and need to borrow to buy your next property, today’s interest rates could be twice as high as your current rates. Capital gains taxes may also apply upon sale.
Then there is the question of your heirs, if any. In a Fannie Mae survey of older Americans last year, 62 percent said their goal was to leave their home to someone else. If you’re proud of the equity you’ve built – especially if you come from a historically disadvantaged group – the house is a testament to perseverance and a legacy of sorts.
So, move on! Are you looking to refinance your mortgage and withdraw cash or take out a home equity loan or line of credit and don’t mind high interest rates? Good luck, because you’ll need a high enough income and credit score to qualify.
That brings us to the reverse mortgage. With this product, eligible people aged 62 and over can acquire equity in various ways, for example through a lump sum. Interest accrues behind the scenes and the reverse mortgage balance increases instead of decreasing as it would with a regular mortgage. Typically, you pay off the mortgage when the home is no longer your primary residence.
Most people reject reverse mortgages. Lenders have not insured more than 100,000 federally insured borrowers in any fiscal year, and that hasn’t happened since 2009.
Why this? Many older people remember scandals surrounding the products, in which borrowers felt deceived and surviving spouses or heirs were unable to keep the houses. New federal protections have helped clean up the situation.
Still, reverse mortgages or something similar seem inevitable in a country where each individual is fully responsible for their retirement savings. A good test of their usefulness is this: Do financial advisors who are committed to acting only in the best interests of their clients help members of their own families borrow in this way?
Jeremy Eppley, a financial planner in Owings Mills, Maryland, is one who does. His aunt lives in a house that she owns outright. However, inflation has eroded her limited retirement income, and a reverse mortgage now allows her to live a better life.
“I had never heard of her going on vacation,” Mr. Eppley said. “She could live a little longer.”
His aunt has no children and potential heirs have no particular expectations of inheritance. If needed, Medicaid could pay for her long-term care. This is a crucial point because many people don’t take advantage of home equity because they want to have plenty left over to finance a caregiver or nursing home themselves.
Of course, entrepreneurial ingenuity is at work. A big part of this is focused on getting people (of all ages) to give some of their home’s future appreciation in value to a startup now in exchange for cash.
Companies like HomePace, Hometap, Point, Unison and Unlock are already there. Your calculators can take your breath away when you see how much savings they could make in a decade.
The ever-increasing financialization of the linchpins of our future—401(k)s and the loans that come with them, the degrees that can get people ahead, and the $1.6 trillion in student debt they require—is alarming . But job cuts and the pursuit of higher education reflect a good instinct: save for later, improve.
When it comes to home equity, we may have come too far to view homes as totems of a well-lived, conservative financial life.
Of course houses are trophies. But their justice is also a tool. Without a radically improved government safety net, people without much savings will need more opportunities to draw them down.
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2024-05-19 09:01:23
www.nytimes.com
