In an ancient time and place known as late twentieth century America, there was a ritual called a “mortgage burning party.” At these ceremonies, homeowners would celebrate their financial freedom from home debt by setting their mortgage on fire. Neighbors would gather to offer congratulations. Refreshments would be served.
Alas, such gatherings are now as dead as disco, due to increased mobility and investment banks turning individual mortgages into collateralized trading vehicles. The very notion of paying off a 30-year home loan has turned almost laughable, let alone quaint.
So if there’s no intent to pay one’s mortgage off and party like it’s 1979, what’s a homeowner to do with all that equity built up over the years? And more specifically, how should it fit into a retirement portfolio?
InvestmentNews sat down with Steve Resch, VP of retirement strategies at Finance of America Reverse (FAR), to answer these questions and more.
[Editors note: This interview has been lightly edited for length and clarity.]
InvestmentNews: How can home equity fit into a homeowners’ long-term financial goals, especially retirement?
Steve Resch: When we’re talking about planning for a 20 or 30-year retirement, many older homeowners and pre-retirees could better safeguard and enhance their retirement plans by including home equity as an additional resource. Our recent Home Equity Punch List Survey found that more than half of homeowners are anxious about their ability to live comfortably in retirement.
At Finance of America Reverse, we know home equity can play a major role in addressing this anxiety by enabling homeowners to leverage their best investment to supplement their lifestyle and help them achieve important financial goals. Including home equity in the financial roadmap can help with a variety of planning objectives for those who are looking to stay in their home for the long-term -- such as delaying Social Security or retirement plan distributions, paying taxes on Roth conversions, managing long term care risks, or simply providing extra cash flow to extend the monthly budget.
IN: Older homeowners are generally wary of using home equity products like loans. Why is that? Are they misguided?
SR: Our survey confirmed that, for many, it ultimately boils down to a lack of awareness about different types of home equity products. That is unfortunate because older homeowners clearly have the best potential to benefit from home equity products, especially as many have seen their home equity rapidly grow over the past few years. When given a chance to walk through how a reverse mortgage works, they’re much more open to the concept.
In addition to general awareness of the products, our survey also found that financial advisers have an opportunity to help educate their clients about potentially incorporating home equity into their retirement planning. Of those surveyed [who work with] with a financial adviser, 9 out of 10 trust that their adviser would discuss home equity with them if it’s in their best interest.
However, less than a third of these respondents have ever even spoken with their advisers about the solution. This may be because financial advisers aren’t licensed to sell home equity products or because they aren’t familiar enough with the different products to make a recommendation. So, this is really about education at the end of the day.
IN: Why is now a good time to borrow against one’s home for financial planning purposes?
SR: Home price appreciation has dramatically increased over the past two years. Many homeowners are sitting on a considerable amount of home equity as a result. Leveraging that equity today can ensure homeowners are getting the most value from their home, without having to sell and buy a new home at today’s prices. Additionally, major inflationary pressures and the volatility in the stock market are really taking a toll on individuals’ pocketbooks and investment portfolios. Those who are in, or nearing, retirement may feel pressure to sell equities to “protect” their retirement nest eggs or need to continue to withdraw money to keep up with existing bills.
Either way, these choices are suboptimal and can erode future earning potential. With home appreciation still at all-time highs, tapping into home equity is a timely solution that can allow retirees to draw from a strong asset class that’s keeping pace with inflation, while allowing other investments time to recover down the road.
IN: Why should a retiree specifically take out a reverse mortgage right now?
SR: A sound financial plan should include a range of solutions to help address their retirement needs. A reverse mortgage provides flexible financing options that can be used at the homeowner’s discretion. Funds can be taken as a lump sum, in installments or as a line of credit. This means reverse mortgages have a wide range of use cases including allowing homeowners to increase their monthly cash flow, covering the costs of long-term care insurance, paying taxes on Roth conversions, making home improvements and other needs.
Importantly, reverse mortgages no longer carry the negative “last resort” connotation of the past and are increasingly being utilized as a responsible risk management tool. With older Americans sitting on over $11 trillion in home equity, a reverse mortgage can be part of a sound approach toward ensuring a diversified and stable retirement strategy.
IN: What specific loan options other than reverse mortgages are available to homeowners? When should they be used?
SR: If someone has a short-term horizon in terms of staying in their current home then a personal loan, cash-out refi or HELOC may provide a better solution. For these other types of loans and home equity products, the upfront costs are less than those of reverse mortgage in most cases. These products tend to be most suitable for those who may sell their home in the near future or are further out from retirement.
For homeowners who are in their early to mid-50s and are approaching what we like to call the “pre-tirement” stage, we’ve also introduced a first-of-its kind solution called EquityAvail. EquityAvail is an innovative hybrid loan offering that combines elements of a forward mortgage with a reverse mortgage -- reducing their monthly payments for the first 10 years before then eliminating their monthly payments altogether -- giving homeowners more options to help prepare for and thrive in retirement.
IN: What are the biggest risks associated with tapping into home equity? How do you make sure your client is in the right product?
SR: The risks vary depending on the specific home equity product we’re talking about. A cash-out refi allows homeowners to take on a larger mortgage in exchange for equity and is similar to a traditional mortgage. This means homeowners must meet certain requirements and could see changes in the interest rate and monthly payments in comparison to their existing mortgage.
A home equity line of credit or HELOC is a type of second mortgage. While some home equity loans provide a large lump sum, a HELOC provides a line of credit that you can borrow against at any time. While this provides more flexibility, it can create headaches once the loan draw-down period ends if you’ve tapped more equity than you can afford to repay. Additionally, there is the potential that the lender can freeze or reduce a homeowner’s credit limit if the property has seen a major decline in value since the loan was put in place.
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