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Home Rich Cash Poor

Mike Drak

ACCORDING TO MY local newspaper, the average home price in my town rose 450% over the past 25 years. That made me ponder how I could use my home equity to fund my desired retirement lifestyle. I’m certainly not alone in thinking this way.

There are three ways you can access home equity. You can sell your home and downsize, you can take out a home equity line of credit or you can take out a reverse mortgage.

The first option isn’t attractive to many retirees. These folks want to maintain their current lifestyle, and remaining in their home can be a big part of that. The stories of COVID-19 outbreaks in nursing and retirement homes only reinforce the desire to stay put. Meanwhile, with a home equity line of credit, you’ll be compelled to make repayments during your lifetime.

What about the third option? I find reverse mortgages quite attractive. They allow you to unlock the equity you’ve accumulated in your home while still living there. That sounds great. Why be house rich and cash poor when you don’t have to be? Yes, reverse mortgages come with steep upfront and ongoing costs. Still, they can play an important role in a retirement income strategy, offering the following features:

  • They give you the choice to receive your home equity as a lump sum, as annuity payments or as a line of credit.
  • There are usually no repayments required until the home is sold—typically after your death.
  • They’re nonrecourse loans. That means that neither you nor your estate will ever owe more than the property’s market value, even if the sum borrowed plus accrued interest is greater.

There are other reasons I like reverse mortgages. For example, they can significantly increase your liquidity in retirement. You can use the extra cash they provide to fund your adventures, make large purchases, give money to family or make home improvements. All the while, you retain possession of a valuable, appreciating asset.

A reverse mortgage can also help you manage sequence-of-return risk by serving as a source of funds during market corrections. When the market drops, you can live off your reverse mortgage instead of selling investments.

In addition, a reverse mortgage can provide income that allows you to defer Social Security retirement benefits. Those benefits increase by roughly 8% for each year you delay claiming. This increased payout continues for life and rises every year with inflation.

With so many benefits, I’m surprised more folks don’t take advantage of reverse mortgages. I believe it’s because there’s an unfortunate stigma attached to them. Many people view a reverse mortgage as the option of last resort for impoverished retirees.

I would argue otherwise. There’s nothing wrong with spending your home’s equity to support your retirement lifestyle. Why choose to live on a tight budget when you have untapped wealth at your disposal?

Consider two couples. The first buys a home and then gradually pays off their mortgage, while the second couple rents an apartment and invests in a stock portfolio. After 30 years, the first couple owns a $1 million home outright, but has little in the way of retirement savings. Instead, the couple’s wealth is tied up in their home, and they lack the cash flow to support their desired lifestyle.

Meanwhile, the second couple has amassed a $1 million investment portfolio. In all likelihood, the second couple would feel more comfortable drawing down their portfolio than the first couple would be taking out a reverse mortgage. I worry that the stigma of a reverse mortgage would force the first couple to struggle financially for no good reason. The first couple made a smart decision by buying a home. They should feel free to make another smart move—tapping their home’s equity to support their lifestyle.

I believe another reason people don’t use reverse mortgages is they worry about robbing their children of an inheritance. Some parents feel shame at not bequeathing a substantial sum. I’m not one of them. My wife and I worked hard to give our kids a good start in life. Now that they’re well-established, I don’t believe they need a further financial boost from us. Leaving them a sizable estate is the least of my concerns.

If the goal is to live your best life in retirement, you should be willing to use all the tools at your disposal. The reverse mortgage can be an effective tool, and more people should feel comfortable using it.

Of course, taking out a reverse mortgage is a major decision. Also, the money that you unlock still needs to be managed wisely. If you burn through it too quickly, you could find yourself in a tight budget situation all over again.

Want to learn more about reverse mortgages? I highly recommend the book Reverse Mortgages by Wade Pfau.

Mike Drak is a 38-year veteran of the financial services industry. He’s the author of Retirement Heaven or Hell, published in 2021, as well as an earlier book, Victory Lap Retirement. Mike works with his wife, an investment advisor, to help clients design a fulfilling retirement. For more on Mike, head to BoomingEncore.com. Check out his earlier articles.

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