Investor’s column: Don’t bank on your home for retirement fund

Today, approximately 30 percent of homes in the United States are owned free and clear, and 17 million of that 30 percent are people age 60 and over.

Since the housing crash a decade ago, home ownership has decreased from 69 percent to 63 percent. However, that news is not necessarily bad.

We have greatly rebounded in real-estate values and are on a more-sustainable trajectory for home ownership. Indeed, the American dream is alive and well.

Living the American dream means lifestyle preservation in retirement, and a well-prepared financial plan is the only way to accomplish your dream. That plan should expose all of your assets, the options with them, and why they would or would not be used.

Many times, equity in your primary residence represents an overweighted, illiquid asset class for a retiree. Because of that, many advisers look past your home in your financial plan. One of the least-popular ways to tap equity in a home (due to a reduced lifestyle) is to sell the home and downsize.

Most are unwilling to make the necessary cuts when it comes down to it. A few reasons an adviser would steer clear of the home as a usable income producing asset: Clients want to pass their properties down to their children, or if long-term care is needed outside of the home and the owner must move to a professional care facility.

When a client wants to maintain their residence during retirement but needs or desires the cash equity in their home, either a home equity line of credit or a reverse mortgage is recommended.

The home equity line of credit sounds good until you can’t afford the payment or the lender decides to reduce or close the credit line.

Fortunately, at age 62, the government allows reverse mortgages to create additional retirement income or cash to home owners who have considerable equity in their homes. One option with a reverse mortgage (there are several fixed and variable income choices) that is a strong solution is the reverse mortgage line of credit.

Although it will have higher upfront costs versus a home equity line of credit, the value can grow marginally to offset the initial closing costs over time while it remains unused. The borrower can elect to make payments or not make payments.

Since the loan is insured by the government, the credit line cannot be closed or reduced if the property is owner occupied and maintained, and taxes and insurance are paid annually. So, you have the security of access when needed. However, if the reverse mortgage line of credit remains unused, the property or the full value of the property still will be able to be passed on to heirs.

When our firm provides retirement planning, especially when making decisions with a primary residence, we consult with mortgage professionals, CPAs, and estate and elder law attorneys. Counseling is now required by the Consumer Financial Protection Bureau when executing a reverse mortgage.

On a final note, this month the mortgage insurance rates and equity values have changed on reverse mortgages. Those changes are viewed as more restrictive, but necessary to protect the consumer and the tax payer to preserve the program.

This story was originally published October 9, 2017 at 12:09 PM with the headline "Investor’s column: Don’t bank on your home for retirement fund."