For more than half of all U.S. households, home equity -- the value of a home minus the debt owned -- accounts for at least 50 percent of net wealth, according to the Survey of Consumer Finances, published by the Federal Reserve. Statistics also reveal -- according to an annual government report, A Profile of Older Americans -- that the over-65 population is swelling and an increasing number of retirement-age Americans are being forced back to work. More money problems are on the way, with half of U.S. households in jeopardy of being able to sustain their lifestyle through retirement, says the Center for Retirement Research of Boston College.
Home equity loans were traditionally used has a last resort for retirees, but a growing number of seniors are tapping their home equity earlier, either as a financial buffer, to sustain income security, or to improve debt management.
How can retirement-age homeowners tap into their home equity in a responsible and fruitful way?
For retired Americans who have a small mortgage or no mortgage and low levels of debt, leveraging the equity in their home -- either through a home equity loan or a second mortgage -- is a way to free up immediate cash.
"It would be cheaper than taking out an unsecured loan, where the rates are generally higher," said Clifton Thomas, a CPA in San Francisco, though he cautioned that this be determined on a case-by-case basis and is not a viable route if monthly payments cannot be covered.
Increased longevity has many over age 65 worrying that they may outlive their retirement resources. For those who do not have income from employer-sponsored pension plans, longterm financial security may be unusually challenging. Some financial planners recommend deferring Social Security payments and taking out a term home-equity loan or reverse mortgage to help fund expenses for a few years, when they will qualify for maximum Social Security benefits.
Another common fear of older Americans is having to spend their last years in a nursing home. But better overall health and the growth of community living has drastically reduced that risk. Today, most people would prefer to live in their homes for as long as they can. As a result, preserving the value of one's home has become more important -- and having a financial cushion helps older homeowners make repairs such as faulty furnaces and leaky roofs before they become more serious. A HELOC, which requires borrowers only to pay interest on the amount they use from the loan, is well-suited for this purpose.
As older Americans struggle to pay rising household expenses, their use of credit cards has expanded, according to the Survey of Consumer Finances. Today, nearly 50 percent of families aged 55 to 64 carry credit card debt. Debt consolidation may be a good way to fend off personal bankruptcy. Shifting credit card debt to a HELOC is a good way to lower monthly expenses, since interest rates for home equity debt are much lower than than those for credit cards.
For those seniors with existing mortgages, monthly payments make it hard to enjoy later life. In this case, a home equity loan or reverse mortgage can allow homeowners to defer monthly mortgage payments on a conventional mortgage.
Experts say that it's never too late to make a financial plan that will access your current assets and expenditures, and project your future cash flow. Michael Gray, a CPA in San Jose, Calif., recommends that seniors hire a fee-only financial advisor rather than one who is commission-based, who may (or may not) benefit from clients moving money in and out of different investments.
For qualified homeowners, a home equity loan and a HELOC will likely be among the options recommended. As part of a responsible retirement plan, both may provide financial security that previously seemed unobtainable.