Financial Planning: Manage Housing Wealth with Reverse Mortgages

Housing costs are taking up more of older adults’ incomes than anything else, however, borrowing against established home equity can help retirees manage their housing assets in retirement, according to a recent article from Financial Planning.

“On average, the value of housing equity is about 35% higher than the total value of all financial assets such as savings, brokerage accounts and retirement accounts,” the article states.

Housing dominates the asset side of the balance sheet, the article explains. Financial planners can go two different paths when assisting clients in managing this asset. One is for clients who have sufficient equity in their home and the other is for those who don’t.

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For those with home equity they can tap into, establishing either a home equity line of credit or looking into a reverse mortgage with current low interest rates are the two suggested options, the article says.

“Reverse mortgages, in particular, continue to evolve and are gaining more acceptance as prudent strategies for the right candidates,” the article states. “They now offer greater safety via federal insurance and pre-screening of applicants.”

It is made clear however, that this option is not for everyone and that financial planners should ask themselves if it is a financially suitable option for someone to strive to pay off their mortgage in the first place.

“Housing is the largest source of wealth for Americans over 65, according to a 2010 Boston College Center for Retirement Research, Using your home for Income in Retirement,” the article states.

Read the full Financial Planning article.

Written by Alana Stramowski

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  • “…however, borrowing against established home equity can help retirees manage their housing assets in retirement….” So borrowing helps retirees manage their housing assets but how? Even with a lot of explanation, that quotation would probably still make little sense.

    Here is another interesting statement: “Reverse mortgages also benefit from current low interest rates, since lower interest payments mean higher potential payouts to borrowers.” While the first part of the quote is accurate, everything after the adverb “since” is way out there somewhere in center field. The subject was reverse mortgages so how do lower interest payments come into play? It is though Paul has never spent significant time trying to understand HECM basics.

    While Paul tries to make his mark when it comes to home equity but seems to fall far too short when it comes to seniors.

  • On one hand Mr. Norr states that “Housing exerts an outsized influence on both sides of the balance sheet.” This means that the value of the home is enormous on average when compared to other balance sheet assets. Since assets are equal to liabilities and equity, home value must equal the sum of its related liabilities plus home equity (its net value in the equity section of the balance sheet).

    Then Mr. Norr discusses the impact of the home on the asset of the balance sheet by stating: “On average, the value of housing equity is about 35% higher than the total value of all financial assets such as savings, brokerage accounts and retirement accounts.” So if housing equity is value minus debt, then that is what is found in the equity section of the balance sheet, not its asset section.

    While Mr. Norr appears to have a fine education in chemistry, his knowledge of balance sheets seems rather limited. Home value and the value of home equity may be exactly the same but only when the home does not serve as collateral on any loans!

    Home equity can be an asset if the underlying debt is nonrecourse and there is adequate disclosure. Yet the home equity found on the balance sheet (if ever) may not always be equal to the home equity defined by the real estate and mortgage industries. The reason is that home equity can have a negative value in those industries but not on a balance sheet, yet the negative value must be noted and disclosed in the financial statements.

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