Homes Paying for Retirement

Two years ago, George and Mollie Weiner were scraping by on $1,800 a month in Social Security payments and just $100 in monthly payouts from their individual retirement accounts.

But last year, the couple, both 80, realised they could generate more income from their two-bedroom condo near Tampa, which had more than doubled in value since they bought it in 1997. They took out a “reverse mortgage”, a loan that does not require monthly repayments, giving them access to more than $100,000.

“We are very relaxed now because we have extra spending money,” George Weiner said. “And the house is taking care of it.”

An increasing number of retirees may be starting to follow the Weiners’ example. New data released recently by the Federal Reserve showed that overall wealth increased very little for most American families from 2001 to 2004. For the typical American household, net worth — the sum of all assets less debts — barely increased, to $93,100 from $91,700. Their savings dropped by 23 per cent while the value of their homes rose 22 per cent.

For retirees, this shifting financial status is likely to force many of them into a decision no other generation has faced: to use their home as the centerpiece of their retirement plan.

“People are living longer and longer, so over time they’re going to be draining their retirement accounts,” said Gillette Edmunds, an investor and co-author, with Jim Keene, of “Retire on the House: Using Real Estate to Secure Your Retirement” (John Wiley & Sons: 2005.)

Already, evidence is mounting that older people are tapping the equity in their homes more aggressively. In the late 1980s, the Federal Housing Authority began a pilot programme of reverse mortgages — loans, made mostly to seniors against the value of their homes, which do not require monthly payments.

The loans are usually worth some fraction of a home’s value, and only need to be repaid, with interest, when the house is sold or the borrower dies.

The programme drew little attention for more than a decade. But as home prices soared, it took off. Last year, more than 43,000 older homeowners took out reverse mortgages insured by the Federal Housing Authority, a six-fold jump since 2000.

“This is the fastest-growing mortgage segment by far,” said Jim Mahoney, chief executive of Financial Freedom, an arm of IndyMac Bank that specialises in reverse mortgages. “Clearly this is a product whose time is coming.”

Source: New York Times