December 4, 2018
Home Equity Offers Big Boost to Retirees
Retirees’ primary sources of income are the usual suspects: Social Security and employer retirement plans. They rarely use a third option: the equity locked up in their homes.
The Urban Institute recently quantified how much this untapped equity could be worth to seniors in the United States and 10 European countries if it were converted to income – and the amounts are significant.
The typical retired U.S. household has the potential to increase its retirement income by 35 percent, researchers Stipica Mudrazija and Barbara Butrica estimate. In Europe, using home equity would add anywhere from 19 percent in Sweden to 100 percent in Spain.
But tapping this asset is a big “if,” because the financial products available to convert home equity to income are rarely used, whether a reverse mortgage in this country or the sale and leaseback of a home in Denmark.
The vast majority of U.S. retirees are homeowners, and the study highlights a central contradiction in their finances. Many baby boomers will struggle to maintain their current standard of living on just their Social Security and retirement savings and could put the additional income from their home equity to good use. Yet only about 2 percent of eligible older homeowners take out a federally insured reverse mortgage (Home Equity Conversion Mortgage) every year.
The researchers cited several reasons for the low demand in the United States and Europe for various financial products that convert home equity to cash. The barriers include the high cost of the products, an aversion to taking on more debt, and homeowners’ desire to leave an inheritance.
A separate issue is that homeownership is concentrated among middle- and high-income retirees, so home equity products have less potential to reach lower-income seniors, who have the greatest need to supplement their income.
The researchers conclude that while converting home equity could be an important option for increasing income, it currently has only a limited role in supporting old age security.
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.