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Reverse Mortgage

The Street: Reverse Mortgages Make Sense for Retirement

When comparing the amount of home equity Americans hold with the amount of retirement savings they have saved up, the numbers are actually closer than some people may think.

There was more than $13 trillion floating around in home equity in the first quarter of 2016 and just over $14 trillion in retirement savings, so considering using home equity to fund retirement may not be as disadvantageous as some people once thought, explains a recent article from The Street.

Borrowing against home equity can actually make a lot of sense for retirees because of the current low interest rates and an appreciating housing market, the article points out.

Though, the people who would actually tap into their home equity to help fund retirement are fewer than one in six, according to the article. A lack of awareness among the public is another reason for home equity’s low utilization.

“I’d suspect that many people don’t think about putting money into their home for purposes of retirement,” said Matt Sadowsky, director of retirement and annuities for TD Ameritrade in the article. “But that doesn’t mean it can’t be used for retirement and an income generating tool.”

An option for tapping into home equity that is brought up is a Home Equity Conversion Mortgage (HECM) for those homeowners who are 62 and older.

Consumers generally still have a poor understanding of reverse mortgages, the article pointed out, but there is also a large number of retirees who prefer to leave their financial legacy to their heirs, which deters them from utilizing their home equity.

However, one fact that the public isn’t largely aware of is the “friendly” tax code when using equity in a primary residence as an asset to be sold after retirement.

“If it’s your primary residence, the first $250,000 of gains is not taxed, and if you’re married, it goes up to $500,000,” Sadowsky said in the article. “That’s a very important benefit that most other investments don’t have.”

Read the full article at The Street.

Written by Alana Stramowski