Should retirees cash in on inflated home values?

Inflation provides a "good news-bad news" scenario for retirees who own houses. The good news is that inflation has boosted the market value of many homes, and retirees may have gained a substantial nest egg with the increased equity. But, there is little to be gained from the high equity value in a house if the owner can't have the money out.

Selling to extract cash from the equity is one way. The retiree ends up with a bundle of cash and no place to live. I have argued that retirees should not sell their homes and rent replacement housing. They should either sell and buy a small house or condo, or move out of the big house and rent it while living in a smaller place.

Reverse annuity mortgages (RAMs) might provide another alternative. The Federal Home Loan Bank Board opened the door to federally chartered savings and loan associations to offer RAMs, but few have started programs. State-chartered savings and loans in California and Ohio have pioneered RAMs with the program offered by the Broadview Savings & Loan Co. of Cleveland, Ohio, one of the forerunners. Undoubtedly, the shortage of lendable funds and unprecedented high interest rates have been factors in slowing development.

A reverse annuity mortgage permits an owner to borrow against the equity value of the house for living expenses. The owner will usually own the house free and clear, and the equity provides a resource to be used for boosting income during retirement. Interest on the funds borrowed is added to the accumulating "bill" charged against the equity.

When the owner dies or decides to sell, the house is sold and the RAM loan is paid off in full from the proceeds. When interest rates were at lower levels, the annual appreciation of a house offset a large part of the funds borrowed under a RAM. The big advantage is that the owner continues to live in familiar surroundings.

How long the equity in a house can support a person or couple depends on the value of the equity, the interest rates, and the amount withdrawn monthly. Broadview S&L offers plans extending from five to 20 years. Less cash is available each month over the longer periods. At the end of the RAM period, the Broadview Plan offers three options.

1. The loan could be set up for repayment just as if the house were being purchased. Usually, this option is blocked by a lack of income unless eventual heirs provide interim cash.

2. If appreciation has increased the equity by a substantial margin, a new RAM may be negotiated and regular payments continue.

3. The loan can be paid off without penalty by selling the house.

RAMs are one alternative, but the inherent problems in offering them is apparently responsible for a lack of interest among some lenders. "We don't want to get into the position of having to evict old people from their homes when a RAM matures and the equity has been used up," I have been told.

More RAMs will likely be available once the current crisis in real estate financing eases. There are obviously pros and cons to the system, and the applicability of any available RAM should be assessed for each case.

If you are interested in RAMs, inquire in your community about their possible availability.