Insider Jeff Fleming

Locked Assets

Our homes, more than any other investment, lock up our equity. When we need the locked funds for retirement, our options may be limited.

Dear Jeff:
My husband has been retired for 10 years and is 70. I will soon be 61. We owe $38,000 on a home that has payments of $283,000. We have a home equity line of $4,000. Our interest rate is 7.5 percent on the house. However, it is worth $125,000 on the market.

Our savings are down to $13,000 and the bank will only qualify us for a $70,000 mortgage. I did not work. We are budgeting every month and feel we have no money because our equity will always be tied up in too big a house. There isn't an easy way out. We don't know what to do so we can live worry free or at least have peace of mind. I need badly to feel settled. Could you please help? Pat

Jeff Says:
It's no secret that most people have trouble saving regularly. Even consumers who can budget their income, manage their expenses, and pay their bills on time still have trouble saving any money. I am making a huge generalization with my next statement; however, I truly believe that the common thread or similarity between the majority of those who fit this financial description is that their home is their largest asset. I do not have any statistics to support this proposition, but I think it makes sense, logically.

People buy homes and finance the cost of the purchase with mortgages. They remain in their home for years during which time the home appreciates in value. In the meantime, they make their regularly scheduled mortgage payments, in part, at least because they don't want to lose their home. These payments reduce the loan amount and further increase their equity. Years later, as they approach retirement, these folks have a lot of equity in their homes, yet no easy means to unlock it and virtually no other savings. Think about it! What other asset forces us to save in a similar fashion?

At this point, your options may be somewhat limited. First, you could sell your home and then move into an apartment. Rent payments would replace your mortgage payments, and often they are just as much. Unlike a mortgage, you don't build equity when you pay rent. So, you could find a less expensive home.

Second, you could sell your current home, use a portion of the proceeds to buy your new, less expensive home and invest the difference. Here, you might face a timing problem. You have to sell your house first before you can buy another home. You can solve this problem by making your offer on the new home contingent upon the sale of your current home. If you have trouble selling your current home, you would not be obligated to proceed with the purchase of the new home.

Finally, you could obtain that mortgage you mentioned on your existing home. The disadvantage is that you could be saddled with a larger mortgage payment. Now is the time to check, however, because interest rates on mortgages are near all-time lows. This means that you could possibly refinance your existing mortgage and home equity loan and wind up with a lower monthly mortgage payment. Refinancing may or may not be appropriate for you, so you should be sure to work with a banker or financial consultant who can help you make the right decision.

Saving Late in the Game