Your house is a vast deposit of wealth, especially in your older years, but it's up to you to decide whether or not to tap into it.
According to the Center for Retirement Research at Boston College recently found that Americans over the age of 65 often have more cash in their homes than in 401(k)s, IRAs or other investments. The average U.S. homeowner age 65 through 74 has $125,000 in financial assets. By comparison, those same individuals have an average of $150,000 in home equity. That disparity grows, with $115,000 in assets and $160,000 in home equity, between the ages of 75 and 84.
The Center also points out that roughly 30% of all income for folks ages 65 through 74 goes into utilities, taxes and upkeep on their homes. Meanwhile, the growth of home values in recent years has only given retirees more equity to work with.
According to the National Association of Realtors, the median existing home price of $239,700 in May was 4.7% higher than it was a year earlier. That marked nearly four consecutive years of price increases, even as the interest rate on a 30-year fixed-rate mortgage actually lowered from 4.51% on June 30, 2011, to 3.48% on June 30 of this year, according to Freddie Mac. Total housing inventory at the end of May rose 1.4% to 2.15 million existing homes available for sale, but is still 5.7% lower than a year ago (2.28 million). Unsold inventory is at a 4.7-month supply, which is still well below the six-month supply that's considered ideal.
"Existing inventory remains subdued throughout much of the country and continues to lag even last year's deficient amount," says Lawrence Yun, chief economist at the National Association of Realtors. "While new home construction has thankfully crept higher so far this year, there's still a glaring need for even more, to help alleviate the supply pressures that are severely limiting choices and pushing prices out of reach for plenty of prospective first-time buyers."When we checked in with TD Bank in January, its home equity survey found that 56% of respondents believe their home's value has increased, and 60% would tap that rising equity to finance renovations, with 53% of Millennials considering such a move.
"Consumers have been reluctant to start home renovations in recent years because of all the uncertainties in the economy," said Mike Kinane, senior vice president of home equity at TD Bank. "It's encouraging to see a growing appetite for these projects."
But that hasn't made everybody eager to touch their home equity. With the U.S. housing crisis at its depths in 2012, according to RealtyTrac, more than 12.8 million U.S. homeowners (29%) were seriously underwater — owing far more on their mortgages than their properties were worth. By the first quarter of this year, that number fell to 6.7 million (12% of all mortgaged properties), while the number of equity-rich homes (with at least 50% positive equity) has climbed to more than 12.3 million, or 22% of all mortgaged properties. Meanwhile, 49.7% of homes in foreclosure have at least some equity, the highest percentage since 2013.
"Over the past three and a half years, the number of seriously underwater properties has been cut in half, but we continue to deal with a long tail of seriously underwater properties, and it will likely be another five years at least before most of those remaining underwater properties move into positive equity territory," says Daren Blomquist, vice president at RealtyTrac. "At the other end of the spectrum, the growing number of equity rich properties reflects a moribund move-up market and restrained leveraging of home equity by U.S. homeowners"
However, older generations are just now digging out from the equity hole left by the recession. As RealtyTrac notes, San Jose, Calif., (1.8% underwater); Portland, Ore. (4.1%); San Francisco (3.8%); and Austin (4%) have recovered. But there are still markets that aren't so lucky. Las Vegas (26.2%); Lakeland, Fla. (23.8%); Cleveland (27.1%); Akron, Ohio (26.2%); and Dayton, Ohio (23.7%) all have a significant number of home underwater, with 44% of foreclosed homes Vegas worth less than what's owed on them
As a result, home equity lines of credit dropped $26 billion during the last year, to $485 billion of all U.S. debt, according to the Federal Reserve Bank of New York. That's less than U.S. credit card debt ($712 billion), auto loan debt ($1.07 trillion), student loan debt ($1.26 trillion) and mortgage debt ($8.37 trillion). It was also the only large segment of U.S. debt to decrease year over year. Not surprisingly, its 2.2% delinquency rate is a fraction of the 7.7% of credit card bills paid late and 11.5% of student loans that have fallen behind.
Rick Huard, senior vice president for consumer lending product management at TD Bank, suggests that home equity lines of credit can be useful to retirees for paying health expenses or unforseen housing expenses. He notes that a HELOC's most beneficial post-retirement use for Baby Boomers, however, is as an emergency fund.
"Many Boomers fail to consider the equity in their home as a source of money for unexpected expenses, like a car repair," he says. "Boomers should meet with a lender who can evaluate how a HELOC can be useful as these expenses pop up during retirement years."
You just need to keep in mind the intricacies of the loan. For the first ten years of a HELOC - known as the draw period - a borrower can borrow money and pay it back as they wish, with only a minimum, interest-only payment required. When those ten years are up, though, that line of credit shuts down and the outstanding balance requires payments to both the principal and interest, which can draw out to as many as 20 years.
Greg McBride, chief financial analyst for Bankrate.com, notes that a $30,000 balance at a rate of 3.25% would require a minimum payment of $81.25 during those first ten years. However, that same $30,000 balance on a 20-year repayment schedule of principal and interest more than doubles the monthly payment to $170.16.
"It is this conversion from interest-only payments to principal and interest payments that could pose problems for unsuspecting or ill-prepared borrowers," McBride says, "particularly at a time when household budgets are still very tight and income gains have been hard to come by."
Even the TD Bank has found that homeowners are uncertain and confused about the terms and conditions of a typical HELOC. The majority (63%) of Baby Boomers how a HELOC's expiration will affect their monthly payment, compared to 9% of Millennials. Over half (55%) of Baby Boomers have no plan for what to do when their loan's draw period ends, compared to just 6% of Millennials.
Granted, you might also consider turning your equity into a Home Equity Conversion Mortgage -- or reverse mortgage -- but you have to be at least 62 to do so. You can get your home equity, you can stay in your house without making any loan payments and it won't affect your Medicare premiums or Social Security taxes. However, there are fees involved and the annual supplemental income may not be worth it if you're looking to leave the house or its full value to an heir. Also, you'll want to check into all of your options just to make sure that a standard HELOC wouldn't serve you better without eating into too much equity or forcing you to relinquish your home when you die.
"For a retired Boomer, a leaky roof can mean trying to squeeze assets to pay for something they haven't budgeted for," Huard says. "Borrowing against your home is a great way to finance these short-term needs during retirement."