Last week, we posted about the $5.5 trillion in equity that homeowners are sitting on and pondered when and how homeowners would start to tap into this equity. According to the census bureau, the current average sales price of a home in the US is $376,700 but just 5 years ago it was $312,500. That is an increase of $64,200 (or 20%) in just 5 years! With a surge in housing prices, most homeowners are probably unaware that their assets have appreciated so quickly and may be in a position to use the equity for their benefit. The obvious and easiest choice for homeowners is to open a HELOC but some are looking at this from other angles.
According to NerdWallet, some borrowers who are 62 and older are using the equity in their homes to take out reverse mortgages to put themselves in a better financial position for retirement. Social Security recipients may start receiving benefits at age 62, but at a reduced rate from what they could receive monthly if they waited until later. For the most part, the benefit increases each year you wait until you reach age 70. Some borrowers and financial planners are using reverse mortgages to help borrowers retire earlier and delay social security benefits until they are at the maximum benefit amount. Others are using the reverse mortgages to hedge their portfolios so they can borrower against the reverse mortgage instead of selling stocks when their value is low. This puts less risk on the borrower to run out of money later in retirement and wait for the stocks to increase again before selling. As more of the baby boomer generation enters retirement, they will have more equity in their homes, and more ways to borrower against it.
Reverse mortgages may be one way to go for those who are in the right age bracket, but what about everyone under the age of 62 or those who do not wish to take out reverse mortgages? According to Experian, in 2017 the average American had $24,706 of non-mortgage debt and an average balance on credit/retail cards of $8,195. That means the average American has $32,901 of debt that they could payoff through a cash-out debt consolidation loan. According to creditcards.com, the current average APR on credit cards in the US is currently 16.38%. Even with rates on the rise, I hope we don’t see mortgage rates approaching the 16% mark anytime soon and a debt consolidation loan may be the best bet for those looking to save on their monthly payments. If the average home price increased over $64,000 in the past 5 years and borrowers have an average debt of $32,000, there should be plenty of room for the average American to take out some equity in their home to not only consolidate their monthly obligations, but also take some extra for home improvements and savings.
I haven’t see my own homes value increasing at the national pace (I wish), but even in the slower growing Pittsburgh market, home prices are on the rise and equity is growing. Tapping into the equity will not be the answer for every borrower or retiree looking to improve their financial position, but for some, this may be the best option. The fees associated with refinancing current mortgages or originating reverse mortgages are changing all the time and interest rates are expected to continue to rise. As we head into the summer, I am interested to see if borrowers will realize their home’s worth and start to shift how they position themselves financially.
The opinions expressed in this post are the sole view of the writer and do not reflect the opinion of Princeton Mortgage Corporation.