Home Equity in Retirement
An Ameriprise Financial survey last Tuesday found that people might have unrealistic expectations about how much they can rely on home equity in their retirement. And the U.S. Dept. of Housing and Urban Development (HUD) has just formalized limitations that will reduce the amount of funds people will be able to get from reverse mortgages.
In terms of their homes, nearly half of the 1,000 aged 50-70 polled said they expected to use home equity to help fund their retirement. Ameriprise termed that response “A surprising statistic considering that housing values remain well below pre-recession levels in many parts of the country. Doing so may be even more difficult for the 37% of homeowners who say they’ve not yet or are not on track to pay off their mortgages before they retire.”
Even homeowners who have a substantial amount of equity in their homes may have a hard time accessing those funds. HUD’s recent action was taken to stem large and growing losses in the FHA program to insure reverse mortgages through what is called the Home Equity Conversion Mortgage (HECM) program. HUD said last week that it would stop offering a popular HECM product and restrict fixed interest rate loans to what is called the HECM Saver loan. While this kind of reverse mortgage charges borrowers much lower insurance premiums than the loan that is being suspended, it also protects the government from loan losses by reducing the percent of a home’s equity that an owner can borrow. This leaves more equity under the control of private lenders—for charges and things like overdue taxes and insurance—and creates a cushion against FHA insurance losses.