While the Great Recession has ended and a housing market recovery has begun, home prices have yet to rebound. Home equity in the U.S. dropped by more than 60 percent during the recession, due to lower home values and an increase in borrowing. This led to many homeowners being “underwater” in their homes – owing more on their mortgages than their homes are actually worth. The good news is that housing prices are expected to recover. However, the housing crisis taught us all an important lesson about counting on the equity in our homes when creating a retirement plan.
If you rely on your home’s value and factor that heavily into your retirement plan, you could end up under-funding your retirement. It’s better to think of your home as a current choice you’ve made with your money, and remember that living arrangements may change later. If you’re counting on selling your home, downsizing to a smaller house in retirement, and then using the leftover profit for living expenses, you could be making a very risky move. Consider the fact that you may need to sell your home before it has recovered its value. You wouldn’t make the profit you had planned, but you’d still have to pay realtor fees and moving expenses. You could end up with far less retirement funds than you’d previously hoped for.
Reverse mortgages are another common component of many individuals’ retirement plans. In a reverse mortgage, a bank grants you a loan which you don’t have to repay as long as you remain in your home. Once you pass away or move permanently to a retirement home, the bank takes possession of the home and sells it to repay your loan. This strategy comes with several inherent downfalls, including significant fees and the fact that you may receive considerably less than your home is worth. The dangerous part of this plan, however, is that you remain vulnerable to market conditions. If at any point you need to sell the home to repay the loan, you may find yourself stuck with an under-valued home and be unable to sell it at enough of a profit. These plans are very uncertain and serve as a reminder that your retirement plan should never center around your home’s value.
Rather than be subject to volatile real estate market conditions, formulate a solid plan with a financial advisor. When you leave your home out of your retirement equation, you won’t be vulnerable to a future housing crisis or find yourself forced to sell your home at an inopportune time.
