How to take advantage of the peak in senior housing wealth
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Senior homeowners are in a position to cash in big on record housing equity. According to the National Reverse Mortgage Lenders Association, overall wealth for homeowners 62 and older hit an all-time record in the second quarter, $9.57 trillion. This was a remarkable 3.7 percent or $339 billion increase since the beginning of the year.
This increase in senior housing wealth was attributed to an estimated 3.4 percent or $381 billion increase in home values. This was offset by a $42 billion jump in senior-held mortgage debt.
“The responsible use of home equity may be an option to help mitigate certain market risks and help seniors stay financially secure during future market disruptions,” said NRMLA’s Executive Vice President Steve Irwin.
Why home prices are soaring
Overall price growth has largely been driven by supply and demand. When there’s less supply, demand typically goes up — pushing housing prices even higher.
The median sales price hit $353,900, up 13.1 percent year-over-year. Considering sales are down 5.8 percent from a year ago, it comes as no surprise that inventory is down 12 percent since October 2020.
A lack of inventory of residential properties means that sellers can list their homes at higher price points, and buyers are still scooping up properties at record rates while mortgage rates still hover near record lows. There’s been no better time for sellers to take advantage of their growing equity, especially seniors who typically rely on limited income sources.
How to take advantage of record-high home equity
Longer lifespans, elevated costs on medical care and a loss of buying power through Social Security benefits mean that many seniors may need to tap home equity to maintain their desired lifestyle in retirement.
A research working paper released by the Boston College Center for Retirement Research reveals that not only do a majority of seniors choose to remain in their homes as they age, but many senior homeowners have enough residential stability to tap home equity. Even so, many retirees are reluctant to borrow against their homes despite additional spending on healthcare.
Considering senior housing wealth hit an all-time record, leveraging home equity to help fund retirement expenses can be a useful financial tool for some older homeowners to age in place. Here are some ways that you can take advantage of your home equity gains.
Install home modifications for aging in place
A majority of Americans age 50 and older prefer to stay in their lifelong homes and familiar neighborhoods as they age. However, it also means that older homeowners may need to make their homes more aging-friendly to maintain a certain level of independence.
Home modifications are physical changes made to your home to aid in mobility and independent living. These modifications range in price, with minor improvements costing anywhere between $150 to $2,000 with a full home remodel costing about $10,000 on average. Some modifications can be done by a savvy DIYer; however, others may need to be installed by a professional contractor, which can add to the overall cost.
Considering over 15 million Americans aged 65 and older are living at or below 200% of the federal poverty level, most seniors don’t have the extra cash lying around to finance home modifications. Tapping home equity to fund home modifications for aging in place is one option for house-rich but cash-poor seniors.
For seniors who wish to live at home but are living with chronic health conditions, acute injuries or illness, limited mobility and other ailments, in-home care is essential. Home care is non-medical caregiving and assistance given in your home and depending on your needs, a home care aide may provide assistance anywhere from one hour a week to 24-hours a day. In-home care can also be divided into two categories: personal care support and professionally-driven care. While less expensive than a residential care facility, in-home care is pricey.
The average cost of in-home care in the United States is $4,481 a month, according to Genworth Financial’s Cost of Care Survey. The cost of home health care is even higher, at $4,576 per month on average. Most families pay out of pocket for in-home care, but home care costs increase as a senior’s needs increase and it may reach a point where paying becomes a challenge.
Sell your home for big profits
Home prices have grown at a record-breaking rate with profit margins on median-priced single-family home and condo sales across the United States jumping 47.6 percent — the highest since the 2008 Great Recession. The typical home sale during the third quarter of 2021 generated a profit of $100,178, up from $69,000 during the same period in 2020.
Before you consider taking advantage of higher profit margins, it’s important to understand that home equity is not the same as your net home sale proceeds. First, you must determine the market value of the property that you own and subtract the amount that you owe on your mortgage (if you still have one). This would be your home equity; however, you need to factor in any expenses you’ll need to cover throughout the home sale. This can add up to 10 percent of the sale price.
Another consideration is that while it’s a great time for sellers, the current housing market has pushed many buyers to the point of fatigue. Buyers have been burned out and taking a break or leaving the market altogether as home prices rise more quickly than their budgets can handle.
If you’re downsizing, renting an apartment, moving in with family or to an assisted living facility, then there’s no better time to take advantage of the high resale value potential.
Turn your equity into cash
One of the most valuable assets that seniors own that can help with medical bills, paying off debt or virtually anything else is their home. There are three main strategies for unlocking equity — a cash-out refinancing, home equity line of credit or home equity loan.
- Cash-out refinance: This is a type of mortgage refinance that uses the equity that you’ve built up in your home and gives you cash in exchange for a bigger mortgage loan. For example, your home is valued at $300,000 and your mortgage balance is $200,000, meaning you have $100,000 of equity in your home. You can refinance your $200,000 mortgage plus some of your additional equity. Your new loan is $250,000 and you receive $50,000 in cash. Lenders will let you borrow up to 80 percent of your home’s value, including the new mortgage and the cash you receive. You can also expect to pay about 3 to 5 percent of the new loan amount for closing costs to do a cash-out refinance.
- Home equity line of credit (HELOC): A HELOC is a revolving line of credit, like a credit card, that allows you to borrow money against the credit line up based on your available home equity — typically 85 percent of your home’s value minus your outstanding mortgage balance. During the draw period, funds can be drawn from your account using dedicated checks or a drawcard. Minimum monthly payments on the interest are made during this time. When you enter the repayment period, you will no longer be able to access funds and will be required to pay the principal.
- Home equity loan: This is a fixed-rate, lump-sum loan that’s secured by your house. A lender approves you for a loan amount that depends on the percentage of equity you have in your house. Once funds are dispersed, you must repay the home equity loan in fixed monthly installments which include principal and interest.
You are generally free to use the funds as you wish, whether you need the extra cash for a large expense or to pay off debt. Another benefit of tapping home equity is that you can often access cash at a lower interest rate compared to personal loans or credit cards.
Funds you receive are also not taxable as income because it’s borrowed money, not an increase in earnings. The interest you pay may also be tax-deductible if the money you take out is used for home repairs or improvements.
Another option, specifically for homeowners ages 62 and older, is a reverse mortgage. This allows a homeowner, typically who paid off their mortgage, to withdraw a portion of their equity without having to repay it until they leave the home.
Tapping equity through a reverse mortgage is treated as tax-free income and homeowners aren’t required to make any monthly payments until they move out and sell the home or pass away. A popular type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is backed by the federal government.
The amount a borrower can withdraw varies based on several factors: the age of the youngest borrower or eligible non-borrowing spouse, current interest rates, the HECM mortgage limit ($822,375 in 2021) and the value of the home.
You’ll also need to factor in closings costs, which can be costly, but many HECM mortgages allow homeowners to roll the costs into the loan. While this eliminates upfront costs, it lowers the amount of available funds. After closing on a reverse mortgage, there’s a great deal of flexibility in how the funds are received: a lump-sum payment, monthly payments, a line of credit or a combination.
Seniors can use a reverse mortgage in several ways, such as supplementing retirement income, doing necessary home repairs, paying for in-home care or paying large medical expenses.