Home Equity Line of Credit and How it Relates to Reverse Mortgages

The financial landscape has changed quite a bit from what it was 20 years ago. People are living longer, exiting the workforce later, and not receiving as much proportionally from Social Security as individuals have in the past. The Centers for Disease Control and Prevention has reported that life expectancy rose to 78.2 years in 2009, an all-time high, based on preliminary data that includes death certificates from all 50 states, Washington DC, and the U.S. territories. That’s up from 78.0 years in 2008. For men, life expectancy rose two-tenths of a year to 75.7 years in 2009. For women, life expectancy ticked up one-tenth to 80.6 years. To put this in perspective, life expectancy in 1930 (a few years before the Social Security system was established), was 58 for men and 62 for women.

Twenty years ago, the idea that people approaching retirement age would consider drawing against their home equity line of credit to cover costs was largely unheard of. But with home equity now making up two-thirds or more of a pre-retiree’s total assets the natural conclusion of accessing that money when needed has become more popular. While the demand for reverse mortgages has grown, timing the market appropriately can also factor into how much money a homeowner can get out of a reverse mortgage. The Wall Street journal reported this week that U.S. home prices fell for a third straight month in January, adding to evidence that the housing market appears to be weakening even though the economy seems to be improving.

With this in mind there are many factors a homeowner will want to consider. If the homeowner does not have an urgent need to access money, they may want to wait for the housing market to improve in order to cash out more equity or make home improvements to increase property value. Another consideration could be downsizing into a smaller home. This option, however, could prove more challenging and difficult than pursuing the reverse mortgage option. The daunting task of prepping and listing a home in a down market, along with challenges of relocation, can put a physical and mental strain on homeowners trying to enjoy their retirement years. In the end, homeowners should carefully weigh the pros and cons of a reverse mortgage and consult a reverse mortgage advisor if they have more questions.

 

The response above is not intended to be anything other than the educated opinion of the author. It should not be relied upon as financial advice.