By David Peskin
A February 2022 analysis from Zillow found the total value of the U.S. home market doubled in the past ten years, rising to $43.4 trillion. Appreciation at this scale means there is significant opportunity as a homeowner, especially if you are in the 55-plus demographic, since you may have considerable amounts of home equity. The national homeownership rate is around 64% — among holder households, it’s 78.6% — and in the 62 and older group, there is more than $11.12 trillion in housing wealth. According to 2019 census data, the average home equity for an older homeowner is $143,500, a number that’s remarkably higher after the explosive market of 2021.
The Mid-2022 Economic Landscape
As an older homeowner, you typically have more money in savings than your younger counterparts, but in today’s economy, you may be feeling the pinch of inflation, especially as it impacts Social Security benefits. Social Security payments have increased with cost-of-living adjustments, but the threshold at which taxes are owed on these payments is not adjusted with inflation. This puts many older Americans in taxable scenarios, when combined with higher costs for food, fuel, and travel, it becomes increasingly more difficult to maintain a desired retirement lifestyle. A retiree’s income does not keep pace with increases in the working population’s wages, which puts further strain on an overall retirement plan in an inflationary market.
With inflation rising quickly, you may be having to manage decreased cash flow on a fixed income. This might result in restricting leisure activities or dropping financial support for children or grandchildren to cope with cash shortages. As monthly cash flow tightens, your retirement savings may be at risk. Having to face the reality of these challenges, you might be changing your plans by delaying retirement, reentering the workforce, or considering tapping into home equity to ease the squeeze of inflation.
Home Equity as Inflation Protection
Inevitable costs come later in life. These include healthcare, in-home care, home renovations for improved accessibility, standard home repairs, and supporting grandchildren or children with major life expenses. Rising inflation adds to these financial costs, and is, unfortunately, showing no sign of slowing down. As a retiree or pre-retiree, diversifying retirement income to reduce inflationary risks is the next strategic step.
Under pressure from inflation and additional costs that come up later in life, you may consider utilizing the record levels of home equity available for an immediate cash infusion. Tapping home equity can protect a borrower’s cash reserves while providing potential tax benefits.
Tapping home equity can also help avoid lost opportunity costs from investing. For example, when the Dow Jones Industrial Average (DJIA) fell to approximately 19,000 in March 2020, some investors sold their stocks. These individuals then missed out on a 10,000-point increase over the next two years, with the DJIA still sitting above 31,000 in mid-July 2022, despite the market correction. Those who were able to use home equity to meet their cash needs during this time came out ahead in the long run by leveraging income tax-free debt and giving portfolios the opportunity to see sizable gains in the stock market.
Finding the Right Product for Tapping Home Equity
There are several ways homeowners can tap home equity to help manage current financial conditions. Two options to consider are:
HECM: A home equity conversion mortgage is the most common type of reverse mortgage. It’s tailored for older homeowners who have substantial equity in their homes. Borrowers can access the money in their homes in the form of a lump sum mortgage, tenure payments, or a line of credit. (Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable-rate mortgages.) For repayment, borrowers have the option to make any monthly payment they want, including no monthly principal and interest payment, which gives them complete control over their cash flow. (As with any mortgage, you must meet your loan obligations, and keep current with property taxes, insurance, and maintenance.) When the borrower sells the home, passes away or otherwise no longer lives in the home as a primary residence, the loan must then be repaid in full. These loans are FHA-insured, and most candidates for this loan have 50% or more equity in the home. Borrowers must be 62 years of age or older to qualify for a HECM.
HELOC: A home equity line of credit allows borrowers to pull out funds over a defined period and then repay the loan at an established rate. They often feature an interest-only repayment period, and then higher monthly payments until the line goes to zero, as is the case with a traditional line of credit.
Some of the core benefits of a HECM compared to a HELOC include:
- HECMs cannot be frozen, even with a decline in the housing market. Lenders can close or freeze HELOCs under certain conditions.
- HECMs do not typically carry prepayment penalties, whereas some HELOCs may have early closure fees.
- HECMs do not have a maturity date, whereas the standard draw period on a HELOC is typically 10 years. After that, the HELOC will transition to a repayment period and funds can no longer be withdrawn.
- HECMs are designed to allow for payment flexibility, whereas HELOCs require a minimum payment of interest only.
Finding the Right Timing for Tapping Home Equity
With interest rates on the rise, does it make financial sense to use a product like a reverse mortgage or a HELOC? When it comes to timing, consult with a financial advisor to ensure you’re making sound choices. Everyone’s situation is different, so you will need a well-crafted strategy that accounts for monthly retirement income, savings, and expenses.
Those considering utilizing home equity as a financial tool should seek out a qualified financial advisor who can speak with them openly about the best practices for using home equity. Here are some questions to consider and discuss with an advisor:
- Would tapping home equity be less costly than selling invested assets at a loss?
- Are you losing money by not taking advantage of compound appreciation?
- Are you carrying a traditional mortgage, and if so, would you benefit from eliminating your mandatory mortgage payments and automatically increasing your cash flow?
Inflationary times disproportionately impact retirees by disrupting budgets, stressing fixed incomes, and depleting portfolios. If you purchased a home years ago, you may be poised to use record levels of home equity to your advantage. By tapping home equity to pay for one-time or recurring expenses, you can increase your sense of financial security and ideally, fulfill the lifestyle and goals you set to enjoy the golden years.
About the author: David Peskin
Mr. Peskin has been the president of Reverse Mortgage Investment Trust Inc. (RMIT) since its inception. He is also the president of Reverse Mortgage Funding LLC (RMF). He was a director of RMIT from its inception to April 2015. Mr. Peskin served as a board member of the National Reverse Mortgage Lenders Association from 2006 to 2012.