As the American population ages, experts have increasingly pointed to home equity as a key source of retirement income — even as many older homeowners remain hesitant to tap into it for reasons that continue to confound both academics and players in the mortgage industry.
Steven Sass, a research economist at Boston College’s Center for Retirement Research, has studied the behavioral roadblocks to home equity extraction, and concluded in a recent Boston College brief that the main culprits are lack of understanding and fear, as RMD recently reported.
“There’s not really a rational reason to avoid a reverse mortgage,” Sass told RMD in a recent phone interview. “It might be a fairly sophisticated analysis, but it makes sense for a lot of people.”
Sass pointed a finger at some familiar targets, including the deep-seated aversion to going into further debt among older folks, as well as the sense of accomplishment and satisfaction that can come from owning a home free and clear. But he also mentioned distrust of financial institutions in general, as well as a general inability to imagine a need for future cash early in retirement — a key reason many retirees don’t think to open a reverse mortgage line of credit soon after turning 62.
“If you have a sufficient income to cover your expenses, is there any great need to go out and secure this line of credit or get the money?” Sass asked rhetorically. “So I think people might need some impetus to use a reverse mortgage.”
That impetus could be the only way to convince older homeowners that a Home Equity Conversion Mortgage is a good idea, and Sass said the breaking point might start coming earlier an earlier. Social Security benefits could retract in the future, he said, and more and more boomers are entering their retirement years without sufficient cash or investment savings.
“The elderly will be increasingly dependent on savings to support their standard of living, maintain their consumption needs,” Sass said, noting that many of them won’t have employer-paid pensions or extensive Social Security benefits. “As households increasingly need to use their financial assets, at that point, home equity might be viewed as another store of savings and more households will consider using home equity in lieu of, or in combination with, financial outlets.”
While many seniors typically consider traditional “forward” home equity lines of credit as well as reverse mortgages, Sass said they shouldn’t necessarily be used to tap into home equity for retirement.
“A traditional HELOC is just a credit card, cash-flow kind of thing,” Sass said. “It’s not really good for eating your home equity.”
Sass said seniors could use HELOCs to cover specific smaller expenses that might come up during the retirement years — for instance, if a boiler breaks — but because they must be repaid within a set period of time, they’re a less attractive option for people who intend to stay in their homes for an extended period of time.
“It’s a different beast,” Sass said of the HELOC. “To really access your home equity, the two primary ways are to downsides or to take out a reverse mortgage.”