Home equity may not be the best resource for younger people to tap at the moment since it may be needed to help fund retirement, potentially through a product like a reverse mortgage. This is according to Liz Weston, a syndicated columnist for NerdWallet in a new piece distributed by the Associated Press.
The upward trajectory of home equity enjoyed by many American homeowners — including seniors — may make the prospect of tapping that equity an appealing one, but such a decision should warrant further consideration in these current times.
Citing data from Black Knight, Weston describes how the average-priced home is up 42% since the start of the COVID-19 coronavirus pandemic, which could lead to average tappable home equity of over $200,000.
“Spending that wealth can be tempting,” she writes. “Proceeds from home equity loans or lines of credit can fund home improvements, college tuition, debt consolidation, new cars, vacations — whatever the borrower wants. But just because something can be done, of course, doesn’t mean it should be done. One risk of such borrowing should be pretty obvious: You’re putting your home at risk.”
A reason for additional caution toward equity tapping provided by Weston comes from lessons learned during the 2008-09 recession, in which home prices lost significant value in a very short period of time. Borrowers from that period who tapped equity, she said, were more likely to find themselves owing more than their homes were worth according to 2011 data, she said.
Other risks may be less obvious, including the potential for needing home equity later on, she explained. She specifically cites that home equity may be needed later for funding retirement, specifically citing a reverse mortgage as a potential use of a home’s equity.
“Many Americans aren’t saving enough for retirement and may need to use their home equity to avoid a sharp drop in their standard of living,” she wrote. “Some will do that by selling their homes and downsizing, freeing up money to invest or supplement other retirement income.”
This may make a reverse mortgage a viable option in later life, presuming that the equity is not depleted, she explains.
“The most common type of reverse mortgage allows homeowners 62 and up to convert home equity into a lump of cash, a series of monthly payments or a line of credit they can use as needed,” she wrote. “The borrower doesn’t have to pay the loan back as long as they live in the home, but the balance must be repaid when the borrower dies, sells or moves out.”
Weston has previously discussed home equity in her column, saying it could be a better option for seniors than credit cards, could help in delaying the taking of Social Security benefits, and could be a good retirement funding resource.
Read the column at the Associated Press.