March
12th, 2013 | by Elizabeth Ecker
Americans have long held onto home equity, for many seeing the
payoff of the 30-year mortgage as an important life milestone, and in turn,
being unwilling to let go. Until now.
Whether the economic downturn has rebalanced Americans’
perspectives on homeownership or home equity is simply the last thing left for
people coming of retirement age today, preferences toward the use of home
equity are changing, according to an annual survey conducted by Ameriprise
Financial.
Today, 47% of those approaching retirement age said they expect
to use home equity to help fund retirement. The figure is up from 39% who said
the same thing five years ago, pre-recession.
The cause behind the shift may be due to the trauma experienced
by households after having lost substantial value in their investments,
Ameriprise speculates, or it could be they have no other place to turn. In any
case, home equity tools can—and will—become more commonplace and more necessary
in the years to come, retirement experts and researchers say.
“Households typically age in place and only sell the house when
a shock comes along,” says Dr. Tony Webb, research economist at the Center for
Retirement Research at Boston College.
Yet pointing to the relatively small number of households that
utilize reverse mortgages, Webb says, the proportion has to change in response
to retirement factors that are also shifting from one generation to the next.
“Although it may not seem like it, we’re in a golden age of
retirement,” Webb says. “Households that are currently retired often have
pensions, and there are still a decent number with retiree health insurance.
But at least in the private sector, pensions are going away.”
Combine a shift away from employer-paid retirement benefits with
the meager savings most households have amassed—the median being around
$120,000, according to the Boston College Center for Retirement Research—and
the house becomes the next thing in line to fund retirement much more quickly
than in past generations.
“Given the final salary pensions going away and Social Security
age going up; given health care costs increasing, households are in a bind,”
Webb says. “The one asset almost all retirees hold is the house.”
Relatively speaking, even in the hard-hit areas of the country
where homeowners saw property values plummet, the house still may look better
than the other investments in a household’s portfolio, says Tucker Watkins,
private wealth advisor with Ameriprise.
“People aren’t getting the interest they were used to. [Using
home equity] has become more more favorable for a lot of reasons,” he says.
Pointing to an extension of loan limits above $600,000, as well
as the introduction of the lower-cost Saver reverse mortgage, the picture has
improved for those interested in tapping into home equity, he says.
“The costs are lower and the security is higher,” Watkins says.
“It makes the reverse mortgage more attractive.”
Changing perceptions
The experts agree, there’s no question people are going to need
more ways to tap into home equity. Yet the want to do so is another question.
Many have historically been hesitant take out a reverse mortgage
for reasons that may not make rational sense, Webb says.
“There may be psychological barriers. They’ve spent their whole
life paying off the mortgage. That’s a psychological explanation, not a
rational one,” Webb says.
Scott Larson
Reverse Mortgage
Specialist
(408) 315-2503 direct
(408) 872-4002 fax
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