Many Americans hold an emotionally driven view of their homes: They think the piles of particleboard and glass are castles. And they think they will grab the brass ring of American life once they pay off their mortgage.
But most people, say experts, would be far wiser to consider their homes as assets. Borrowing against your house or renting it out to generate income can be viable retirement strategies. If the Federal Reserve begins to raise interest rates—a shift that many expect to see this Thursday—Americans who need to bolster their retirements should look at their options sooner rather than later.
Letting go of the emotional baggage on their house was a lesson that Al, 54, and Mary Anne Jerson, 55, learned earlier this year. The couple wanted to shore up their retirement plans. After consulting two financial advisors, they decided the best idea was to clear out debt and prepare themselves for retirement by borrowing against their house in Chagrin Falls, Ohio, outside Cleveland.
That was a hard, emotional transition for Al Jerson.
"I wanted the house paid for," he said. "But looking at it with a logical mind-set, we could see getting rid of rolling debt was more important."
They had a series of goals:
- They wanted to pay off $40,000 in revolving credit card debt they'd built up over the years, toward which they were paying $1,000 a month.
- They wanted to accumulate a pile of cash savings to use in emergencies, especially to have in retirement, when their monthly income steam will be reduced.
- And if they could, they wanted to help their daughters with some payments for college.
A 15-year mortgage for $210,000, replacing one for $160,000 on their $300,000 home, did the trick. Though the new interest rate, 3.5 percent, was slightly higher than the old one, at 2.87 percent, it was lower than the interest rate they had been paying on the credit card debt.
With the additional $1,000 a month in cash flow, the Jersons are now on track to retire and expect to have about $7,500 a month in income from Social Security and their retirement plans.
Tony D'Amico, CEO of the Strongsville, Ohio-based Fidato Group, said he encouraged the Jersons and also advises others to look at their debt as a whole. That means including credit card debt, mortgages and home-improvement loans. Consolidating debt can free up cash flow in unexpected ways to help you prepare for retirement.
But seeing your home as a retirement asset doesn't necessarily mean getting another mortgage, or a reverse mortgage. There are at least four ways your home can help you retire.
1. Borrow against the house. It may be years since you've had a mortgage, or you might be looking forward to paying off your house. This is an old, proud idea in American life: You'll still find, in older homes, a mortgage stone set in banisters to signify a place was all paid off. But a mortgage or a home equity line of credit is still some of the lowest-interest debt around. As long as you have the equity in your house and a paying job, you'll find a bank willing to lend the money. And since the latter requirement is important, it's smart to take a look at this option while you're still working.
"If you can use the equity in your home to fund a short-term or long-term plan to fund retirement, you should consider that," said D'Amico.
2. Look at reverse mortgages. In their book on the retirement crisis, "Falling Short: The Coming Retirement Crisis and What to Do About It," authors Charles D. Ellis, an investment consultant, and Alicia H. Munnell and Andrew D. Eschtruth of the Center for Retirement Research at Boston College, suggest that reverse mortgages could be an option for many Americans who can't afford to retire—though the products could be better, Ellis said in an interview. Reverse mortgages are fairly specialized products, so you have to look to see which financial services companies offer them, and "the cost of the transactions is relatively high."
With a reverse mortgage, no payments are due as long as you live in the house. When you leave it, the house is sold and the proceeds go to cover the loan, plus fees. You can get more information on the federal government's reverse mortgage program at the Housing and Urban Development website.
Reverse mortgages are sometimes criticized for high fees, which can be as much as 2.5 percent of what you borrow. Remember, the lender will try to ensure that at the end of the life of the loan, there will still be enough equity left to pay off the loan, which will limit the amount you can get. Sometimes, homeowners can't afford to pay the property taxes, a failure that then leads to foreclosure, though new regulations aimed at ensuring that homeowners can pay may mitigate that danger.
Another risk is that in an emergency, your equity is gone. So, for instance, if you need to go to a nursing home and need to tap your home for that cost, there may be nothing left to tap.
Rates vary by lender, but since most reverse mortgages are guaranteed by the government, the rates are typically as low as current mortgage rates or lower. In the rising rate environment that is now looming, reverse mortgages become more expensive.
3. Consider renting or sharing. This might sound like a challenge if you've been living alone or with your immediate family, but earning rent is one way to treat your home like an asset. "You could also have members of your own family move in with you to contribute to expenses," Ellis pointed out.
4. Finally, downsize. Obviously, the fastest way to tap your home as a retirement asset is to sell it, using some of proceeds to locate a new living space for yourself—and some to add to your retirement accounts or to pay off debt.
Even if you are reluctant to look at your house in the cold light of impending retirement, you might eventually have to. The vast majority of Americans don't have enough saved in retirement accounts. In 2013, the latest year available, a typical working household approaching retirement with a 401(k) had only $111,000 in combined 401(k) and IRA balances, according to the Center for Retirement Research at Boston College. That's enough to yield an income of about $400 a month.
Meanwhile, the average Social Security beneficiary gets about $1,300 a month from the program, according to statistics from August 2015. You can see that those two numbers don't add up to a whole lot of cruising, dining out or even treats for grandkids.
It's better to investigate your options now, when you have time and the wherewithal.
"It doesn't cost very much to sit down with a pen and paper ... and think about the possibilities," said Ellis.
—By Elizabeth MacBride, special to CNBC.com