Boomers' $3 trillion nest egg

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Americans aged 62 and older had accumulated $3.19 trillion in home equity by the end of the third quarter of 2011, according to data recently released by the National Reverse Mortgage Lenders Association (NRMLA). During the same quarter, home equity increased by $46 billion, reflecting stabilization and improvement in home prices. The $3.19 trillion is the net result of a $4.2 trillion increase in aggregate senior housing values and a mortgage debt of $1.02 trillion.

This is good news for us older folks, as home equity often represents seniors' largest financial asset, frequently surpassing the value of 401(k), IRA and retirement savings combined. As a result, one of the most important issues facing aging boomers will be if -- and how -- to use their home equity to help secure their retirement.

Reverse mortgages are one way to use your home equity in retirement. You can borrow against the equity in your home without having to make monthly payments as required when you have a traditional mortgage or home equity loan. Under a reverse mortgage, funds are advanced to you, and interest accrues on this balance. The outstanding balance isn't repaid until you leave the home, sell it or pass away. You can take loan proceeds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as you continue to live in your home.

According to the NRMLA, 99 percent of the reverse mortgages offered in America are home equity conversion mortgages (HECM) that are insured by the U.S. Department of Housing and Urban Development (HUD). To date, more than 725,000 senior households have utilized an HECM. 

Possible uses of a reverse mortgage include:

-- To pay for high medical or long-term care bills
-- To pay for needed repairs on your home
-- To provide a monthly payment to supplement your retirement income
-- To buy a new home

As with conventional mortgages, you can get a reverse mortgage with a fixed or variable interest rate. Bear in mind: No matter what type of reverse mortgage you get, interest rates are generally higher than conventional mortgage rates. For example, one proprietary calculator shows a fixed reverse mortgage rate with an annual percentage rate (APR) of 5.95 percent, while conventional 30-year fixed mortgages are in the 4 percent territory right now.

Here's one example of how a reverse mortgage might work, according to an online calculator offered by the NRMLA. A 70-year-old couple with a paid-for home worth $300,000 could get a monthly payment of $986 for as long as they live in the home or a single sum payment of $172,564. The calculator shows a variable interest rate of 4.11 percent; at that rate, the outstanding loan balance would grow to $211,037 in five years and $258,086 in 10 years. These amounts would be repaid to the bank if the house were to be sold or the owners pass away.

The monthly income shown by this example would certainly help supplement Social Security and other retirement income, but most likely it won't compensate for not having any other retirement savings. I'd not count on using a reverse mortgage as an excuse not to save as much as possible for your retirement years.

Before you snap up a reverse mortgage to secure your retirement, learn all you can about its terms and conditions. HUD, the NRMLA and the Federal Trade Commission (FTC) all offer excellent educational websites on the topic. In particular, make sure you understand the important conditions, such as upfront fees and insurance premiums, which can range from two to five percent or more of your loan amount.

You should also consider other ways to use your home equity to secure your retirement, including:

-- Renting your house and using the monthly income to cover rent on a smaller, cheaper place,

--  Selling your house and investing the proceeds, or

-- Taking on a roommate by renting a room or two to realize some income.

If you aren't purchasing long-term care insurance, then I'd seriously consider holding your home equity in reserve for the day when you might incur high bills for long-term care. At that time, you can take out a reverse mortgage or home equity loan. If you don't ever need long-term care, then the home equity will provide a legacy to your children. 

Your home equity: How to use it for retirement security
Planning your retirement: 9 ways to reduce your housing costs

As always, take the time to investigate all of your options. You'll sleep better at night, knowing that you're making informed decisions.

  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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