Behavior

Tapping Home Equity – Retirees’ Relief Valve

Woman getting a prescriptionOne telling indication that retirees are in serious financial straits is when they take less of their medications or don’t fill prescriptions.

Nearly one in four low-income retirees has difficulty paying for medications, despite passage of Medicare Part D in 2006, which reduced out-of-pocket drug costs. Between 2011 and 2015, the average Medicare beneficiary spent $620 to $700 a year on prescriptions, and people with diabetes, lung disease, and cardiovascular disease spent more than $1,000 a year.

One way retirees can address such hardships would be to tap some of the equity in their homes. Although a homeowner probably wouldn’t use this strategy just to cover drug copayments, new research finds that older Americans who tap equity significantly increase their adherence to their medications – and this finding has broader significance for improving their retirement security.

Most older homeowners are, on the one hand, reluctant to pull cash out of their homes – often their largest asset – through a home equity loan, mortgage refinancing, or reverse mortgage. Yet many of them don’t have enough income to live comfortably and could put this asset to good use to reduce their debt or pay medical bills if they become seriously ill.

To test how home equity might help retirees, the researchers used a series of surveys between 1998 and 2016 that have data on older people’s finances and ask whether, at any time in the past two years, they took “less medication than prescribed … because of the cost?” The analysis controlled for various influences on financial well-being, including education, marital status, and cognitive health, as well as financial resources.

Extracting home equity improved adherence to medications in the short term, particularly for homeowners over 65 who have little wealth outside of their homes. Separately, the researchers showed that retirees who tapped home equity were significantly more likely to take their medications at a critical time – after experiencing a serious illness.

“Housing wealth can play an important role in reducing economic insecurity,” concluded the study, which was funded by the U.S. Social Security Administration.

There is one problem with this strategy. The same financial products that give immediate financial relief can increase retirees’ monthly costs.

One solution to consider would be government programs that provide retirees with more affordable home equity loans, lines of credit, and reverse mortgages, the researchers said.

To read this study, authored by Stephanie Moulton, Donald Haurin, and Caezilia Loibl, see “Housing Wealth and Economic Security in Retirement: Does Borrowing from Home Equity Increase Adherence to Prescription Drugs?”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make 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.

3 Responses to Tapping Home Equity – Retirees’ Relief Valve

  1. Ellis says:

    There have been abuses reported in the reverse-mortgage field. Excessive fees can greatly increase the amount of equity tapped, decreasing the amount available to homeowners, and robbing them of the equity that would enable them to move on, if necessary.

    I’ve seen this happen to two families. I urge anyone considering tapping their equity to have an independent appraisal and review of the contract.

    • Jacquelyn Harper says:

      Reverse mortgages are a scam. They leave loved ones with nothing once they sell the property because it all goes to the reverse mortgage company in the end. The worst part is it’s much harder today to even qualify for a refi, home equity and to even apply for a mortgage. The banks have made it more difficult for people young or old to apply. Then you have long-time residents in cities who have generational homes who try to get loans to fix up their property because of gentrification but are then denied due to income requirements including having no money in the bank. This article makes it sound like anyone can just waltz into a bank and get approved. This is why so many people are panic selling because people tried during COVID but got denied. This also leaves loved ones who inherited the property to have to sell because they too will be denied a loan.

  2. K Friesen says:

    Reverse mortgages do work for some people, but I agree they should not be entered into lightly and are not for everyone. One thing that seems to be missing from the conversation is that a reverse mortgage can allow a low income senior who has some home equity to continue to live independently when they would otherwise have had to live with family or in subsidized senior living because they have equity but no income. My aunt passed away at 97 after living independently for decades on the income from her reverse mortgage with the additional reassurance that she would have a roof over head until she died. My mom and I toured depressing low income housing for months before my aunt and cousin suggested a reverse mortgage. Mom’s reverse mortgage allowed her to put the minimal equity she had from her previous home (40k) into a down payment on a condo without having to make further payments. Interestingly, she bought in a great area at the bottom of the market in 2009, so in her case the value of the condo has increased substantially more than the mortgage over the past 12 years. From her counseling session we were required to have, we know that this is not common. It’s more common that the mortgage is higher than the value of the home and the loved ones just turn over the keys to the bank. As one of those loved ones, I can’t imagine trading my mom’s independence while she’s alive in the hopes I can scrape up some crumbs when she passes. If she can squeeze every dime out of the little she has to have a better quality of living, I’m all for it. Just my two cents (which I didn’t take from her).

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