Leaving Your Home Out of the Retirement Equation

Plummeting prices and increased borrowing cut U.S. home equity by more than 60% during the Great Recession. Although the recession officially ended in June 2009, home prices have not recovered (see chart).^1–2

In this type of market, it’s not surprising that many homeowners who borrowed against their home equity have found themselves owing more than their homes are worth. Homeowners with a second mortgage are more than twice as likely to be “underwater” than are homeowners with only a first mortgage.³

The good news is that housing values typically recover from downturns. But no matter which way the market heads, it’s probably not a good idea to count on the value of your home to help fund your retirement.

Potential Risks of Downsizing

Although moving to a less expensive home could be appropriate for some people, the falling market of the last few years demonstrates that you may not always be able to sell your current home at the price you expect. Transaction fees and moving expenses could also leave you with substantially less cash than you were anticipating.

It might be more realistic to view downsizing or moving to a different area as a personal choice rather than a way to pay for retirement. If you place too much emphasis on your home equity in your retirement strategy, it could lead you to underestimate how much you may need to save for a comfortable retirement.

Shifting into Reverse

A reverse mortgage may allow homeowners age 62 and older to borrow against the value of their homes. They don’t have to pay back the loans during their lifetimes for as long as they continue living in them. This strategy may be appropriate for some retirees, but it also involves substantial fees — and the amount you can borrow is typically much less than the actual value of the home. Because a reverse mortgage loan must be paid back after you stop living in the home for one year or more, it’s likely that either you or your heirs may eventually be forced to sell it, risking exposure to the uncertainties of the housing market.

Your home might have substantial value, but it also provides shelter and may have sentimental value. You may be in a stronger position to make decisions about your home if you leave it out of the retirement equation.

1) Federal Reserve Bank of New York, 2011
2) National Bureau of Economic Research, 2010
3) The Wall Street Journal, June 8, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.