The High-Class Problem That Comes With Home Equity

A lot of money is tied up in people’s homes. Those who need to tap it most, however, may have the hardest time doing so.

Paying a mortgage is a form of forced savings. If you want to stay in your home, you have no choice but to make each payment. That money — plus appreciation in the home’s value — now equals $31.8 trillion for all households, according to the Federal Reserve, more than three times what it was in 2012.

Saving for retirement, on the other hand, is not mandatory. As a result, some homeowners end up with a lot of home equity but low retirement savings.

Here’s the problem with that situation. A retirement account is relatively easy to tap, and you can do it quickly. Home equity? Not so much.

The most obvious way to get to this equity is to sell your residence. But for some older homeowners, that may be out of the question.

Your home may be just the way you like it, because you built it that way or spent decades fixing it up. If you’re attached to local doctors or a house of worship, it is difficult to cut ties and move away. Clearing out years of belongings is a total pain. And an appropriate and affordable new place — no steps, minimal maintenance — may simply not exist wherever you want to be.

And there’s the money. If you have a mortgage and will need to borrow to buy your next place, today’s interest rates may be double your current one. There may be capital gains taxes on the sale, too.

Then there is the matter of your heirs, if any. In a Fannie Mae survey of older Americans last year, 62 percent said their goal was to leave their home to somebody else. If you have pride in the equity you’ve built — especially if you come from a historically disadvantaged group — the home is a testament to perseverance and a kind of legacy.

So, next! Want to refinance your mortgage and take cash out, or get a home-equity loan or line of credit, and you don’t mind high interest rates? Good luck, because you’ll need a high enough income and credit score to qualify.

That brings us to reverse mortgages. With this product, eligible people 62 and older can extract equity in a variety of ways, say through a lump sum. Interest accrues in the background, and the balance of the reverse mortgage goes up instead of down, the way a normal mortgage would. You generally pay off the mortgage when the home is no longer your principal residence.

Most people reject reverse mortgages. Lenders have rarely underwritten more than 100,000 federally insured ones in any fiscal year, and that hasn’t happened since 2009.

Why is that? Many older people remember scandals involving the products, when borrowers felt misled and surviving spouses or heirs could not keep the homes. New federal protections helped clean things up.

Still, reverse mortgages or something like them seem inevitable in a nation where individuals are entirely responsible for their own retirement savings. One good test for their utility is this: Do any financial advisers who pledge to act only in the best interest of their clients help members of their own family borrow in this way?

Jeremy Eppley, a financial planner in Owings Mills, Md., is one who does. His aunt lives in a house she owns outright. Inflation, however, has eaten away at her limited retirement income, and a reverse mortgage allows her to live better now.

“I’d never heard of her going on vacation,” Mr. Eppley said. “She could live a little.”

His aunt has no children, and potential heirs have no particular expectations about an inheritance. If need be, Medicaid could pay for her long-term care. This is a crucial point, since many people don’t tap into home equity because they want plenty left over to pay for a caregiver or nursing home themselves.

There is, of course, entrepreneurial ingenuity at work. A fair bit of it is focused on getting people (of any age) to hand over some of the future gains in their home’s value to a start-up in exchange for cash now.

Companies like HomePace, Hometap, Point, Unison and Unlock are already at it. Their calculators may take your breath away when you see how big of a cut they could get in a decade.

The ever increasing financialization of the linchpins of our future — 401(k)s and the loans against them, the degrees that can get people ahead and the $1.6 trillion of student debt they require — is alarming. But workplace savings and the drive for higher education reflect good instincts: Save for later, better yourself.

With home equity, we may have tipped too far into seeing homes as totems of a financial life well and conservatively lived.

Homes are trophies, sure. But their equity is also a tool. Absent any radically improved government safety net, people without much savings are going to need more ways to extract it.