Reverse mortgage or downsizing are increasingly the best, financially-sound alternatives for many older Americans.
It’s time to rethink reverse mortgages or downsizing. It really is.
That’s the push coming more and more from retirement experts as people deal with their lack of retirement savings. About a quarter of people 55 to 64 have saved nothing and the latest surveys show the average household in that group has about $40,000 in investment income.
The most recent numbers from the National Reverse Mortgage Lenders Association reports that for Americans 62 and over, there was $3.6 trillion in total equity in their homes through the end of March.
With that much wealth to tap in their homes, experts encourage people to at least consider those two options of taking out a reverse mortgage or downsizing into a less expensive home or condominium.
“We think there will be economic pressure and more people will respond to that pressure by downsizing or taking a reverse mortgage,” says Steve Sass, the program director of the Financial Security Department of the Center For Retirement Research at Boston College. “I think what we would like is for retirees to think about these as viable options. Incomes will be significantly lower in retirement than when people were working. Some people will adjust and be fine and other people will not be able to adjust either because they want to eat Chinese food or they need to maintain their car on the road. There are different reasons for why people need income. Some are needs and some are wants and they ought to know these options to get savings out of their house.”
In a report encouraging the use of these options, the center says the average retiree ages 65 to 74 has $150,000 in home equity. For those 75 to 84, they have on average $160,000 in home equity. In the 85 and older category, the a average two-person household has $150,000 in home equity.
“Home equity is rarely tapped as a source of retirement income even though most US retirees have more money sitting in their homes than they have in their 401(k)s or IRAs,” the report says, “While many talk about downsizing, relatively few actually do it. Many retirees hold on to their home equity to pay future medical bills or pass something on to their children. Maybe it’s time to consider how to convert that equity into income.”
Reverse mortgages continue to be underutilized with the latest numbers from the US Department of Housing and Urban Development putting the number at 60,000 in 2013. Under a reverse mortgage the borrower, who must be at least 62, can tap into their home equity. The loan isn’t repaid until the borrower moves, sells or dies.
A lot of people talking about downsizing but very few do, Sass says. The reverse mortgage is a new instrument but when used properly it’s a great way to access the savings people have locked up in their house. There ought to be a lot more attention to using your house in retirement, he says.
“One reason may be that reverse mortgages are an unfamiliar and complex financial product, and their costs, benefits, and risks are poorly understood,” the report says. “To guide consumers about federally insured reverse mortgages, regulators require that homeowners meet with a government-approved housing counselor to apply for a loan.”
If you are 65 and take out a reverse mortgage on your $250,000 home, you can add a lump sum of $127,000, a line of credit worth $118,500 or yearly payments for a lifetime of $8,600. The money is tax-free and does not effect costs pegged to your income such as Medicare premiums and how much Social Security is taxed. It also allows Social Security benefits to grow to age 70, Sass says.
If you’re 65 and own a $250,000 home and downsize to a home that’s $150,000, you will add about $6,250 a year after buying the second home and paying for brokerage fees and moving expenses leaving about $75,0000, the report says.
One advantage of downsizing is it frees up income for taxes, insurance, upkeep and utility bills that run 3.25 percent of the value of the home, the study says. That would be worth about $3,250 a year and the investment income would net $3,000 a year.
It also gives you a home more suited for retirement, the report says. That’s because your current house is suited to an earlier stage in life with more stairs and rooms than you need in a neighborhood with schools and playgrounds you no longer use, near where you no longer work, the report says.
If people want to move, they shouldn’t wait because they longer they do the more unlikely they are to do so, Sass says It’s important to move while your still in good health as well, he says.
Both are viable options and the decision is up to the person, Sass says. You can even do both, he adds.
“But if you do you want to downsize before a reverse mortgage,” Sass says. “If you take a reverse mortgage first and then you downsize you will have a lot less equity. The earlier you downsize the better. It gets really tough both socially and physically to move as you get older. You want to move when you can pick up the boxes and get out and make friends and get a social life. You can find a place much more suited to retirement than the house you raised your children in.”
Sass says it’s not a requirement that everyone choose these two options. If you don’t need the income and are set financially, you can stay where you are. But if you are facing economic challenges, the home is the biggest asset and the biggest expense, he says.
Of those 65 to 74, housing costs, taxes, utilities and upkeep are 30 percent of expenditures of that age group. The largest category is food, clothing and transportation at 35 percent, the report says.
“If there’s not that much else you can do, it’s a great alternative for addressing your income needs,” Sass says. “Other than that, the best thing is to keep on working. If you can do that, you can raise your Social Security benefits and let your assets grow and shorten the period of time you’re in retirement. Once you’re retired, other than spending less—if that’s not sufficient or you don’t want to — you can certainly look at your house.”