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Abstract
Retirees who want to stay in their homes can tap into home equity through a reverse annuity mortgage that pays them a tax-free monthly payment. We show that conversion of home equity into a reliable income stream could provide a significant boost in retirement income, particularly for low-income homeowners with significant equity. The cost of initiating a RAM, however, and many older adults' concerns about borrowing against this asset have limited interest in RAMs. Recent turmoil in the mortgage market and declines in home prices raise additional uncertainties about the potential for using home equity to boost retirement incomes.
Introduction
Financially strapped older homeowners may be
able to use the equity in their homes to shore up
their retirement incomes (Munnell et al. 2007;
Kohl 2007), and they don’t need to sell their
homes to do it. Retirees who want to stay in
their homes can tap into home equity through a
reverse annuity mortgage (RAM) that pays them
a tax-free monthly payment. Even taking into
account the recent decline in house prices, RAMs
can significantly boost homeowners’ incomes,
but by how much? And what should homeowners
watch out for when relying on retirement
income through RAMs?
For many older adults, home equity represents
their largest financial asset (Weller and
Wolff 2005). Traditionally, older households have
not tapped into their home equity unless some
adverse event, such as the death of a spouse,
forces a sale (Venti and Wise 2004). However, as
home equity values have increased substantially
over the previous decade, even accounting for
the recent downturn, retirees may be more
tempted to turn to their homes to help finance
their retirement.
While only 400,000 reverse annuity mortgages
have been originated through 2007, they
are increasing in popularity—more than 100,000 loans originated in 2007 compared with some
6,600 in 2000 (NRMLA 2008). Many more older
households use a home equity line of credit
(HELOC) to tap into property value, but these
loans need to be repaid right away. RAMs, in
contrast, continue to generate income and do
not need to be paid off until the house is sold.
RAMs, therefore, may be the only solution for
low-income older retirees who are less likely to
qualify for a loan or line of credit that requires
repayment to begin immediately.
In this brief, we use data from the Health and
Retirement Survey (HRS) and estimate the potential
for RAMs to increase older adults’ annual
household income. The HRS data show that
home equity values, after adjusting for inflation,
have increased dramatically for older households
from 1998 to 2006. Increases for homeowners
have been uneven, favoring whites and Hispanics
relative to blacks, and high-income homeowners
relative to those in lower-income brackets. Homeowners
in the lowest-income groups would receive
relatively higher-percentage income gains
from RAMs, as would single homeowners over
married couples. RAMs provide the largest relative
benefit to homeowners in the oldest age
groups (since there are fewer years of payout).
However, relatively low homeownership rates
for low-income, single and the oldest seniors
dampen the median boost to income for all older
households in these groups.
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