Home equity not a retirement solution?

[cute fuzzy bunny]

Whoa folks, before we get carried away with what you THINK i'm saying, let me clarify. Not that such clarification has ever helped in the past. The last time I tried to clarify a position on killing innocent people, I was turned into a supporter of infanticide in under 3 posts...

I have no interest in changing anyones point of view, nor am I insistent on projecting my own onto anyone elses. I'm just trying to understand by asking questions. I got into this mess because someone disagreed with something and the disagreement didnt make sense.

As far as the 'brain wiring' comment, its already been well established that most decisions are made in the gross absence of facts, based on emotional and intellectual hairballs that exist in people. You already know the answer to the question, its simply an exercise in creating the structure of rationality and reasoning to support that. Not that theres anything wrong with that...everyone works the same way.

As far as Scrooges comments...the same sentiments could be made about almost any retirement investment or asset, couldnt they? Every asset and its purchase, holding and sale has lots of implications and concerns/issues.

While there are certainly exceptions, most homes retain value well, increase value with or in excess of inflation, can provide an income stream (reverse mortgages, renting a room or the whole thing), or a lump sum (mortgaging, splitting land or selling outright). Its also probably the most expensive thing you own and perhaps the largest single investment in many investors portfolios.

With that in mind, you exclude it from any planning and dont consider it when investing millions of dollars?

In my case, its an appreciating asset that is an excellent store of value, and to me it represents the opportunity to either be more conservative or more aggressive with my investments because the home effectively acts like a giant bond.

By the way, who the heck is "ted"?

 

[Martha]

By the way, who the heck is "ted"?

I think Rich got you mixed up with your dog. Just like my neighbor thought I was Judy, when it is my dog's name.


I know a few people where home equity likely will be a retirement solution. If you reach 65, and SS isn't enough, a reverse mortgage can be a life saver.

 

[2B]

  I know a few people where home equity likely will be a retirement solution.  If you reach 65, and SS isn't enough, a reverse mortgage can be a life saver.

Think about it....

You can't afford the house you live in. You have no intention or ability to get a job. Now, you take on debt.

This is when you must downsize and pull your assets out of your home to cover your cost of living. I think reverse mortgages were invented as the "last hurrah" for baby boomers to spend it all and then some. What happens to the people when they run out of equity? They are then stretched beyond their means and now they are broke.

It might work but you need to know when you'll die and how much you'll need to die with dignity.

My inlaws will use their home equity to pay for their nursing/assisted living costs.

Dear SIL suggested that since MIL and FIL didn't want to leave their home that they should get a reverse mortgage to pay for in home care. That way they could stay there longer. I almost choked but showed her that they could have in home care for about 3 years and then there was no equity left in the house. That would be a great plan if we were sure they would die within 3 years or she has lots of money to cover them after that.

By moving into a "facility" they have enough for 12 to 15 years based on the latest real estate agent's market analysis. Of course, my inlaws keep saying that they want to stay in their home. They no longer can make a rational decision.

 

[Rich_by_the_Bay]

By the way, who the heck is "ted"?

Ah.. there it is - post by ESRBob where mentions what I assumed was your nom de plume: p. 243 of his book, he states.

Sorry -- CFB it is.

 

[Scrooge]

I think Rich got you mixed up with your dog.

Now, is that a step up or down from the infanticide charge? 

 

[Scrooge]

As far as the 'brain wiring' comment, its already been well established that most decisions are made in the gross absence of facts, based on emotional and intellectual hairballs that exist in people. You already know the answer to the question, its simply an exercise in creating the structure of rationality and reasoning to support that.

Sure, that's very common, but the interesting question is how did we first arrive at the answer that we "already know", which we then rationalize after the fact? This is a causal world after all It could be hidden self-interest or "nature" or "nurture", but whatever it is, it's real and usually worth looking into.

As far as Scrooges comments...the same sentiments could be made about almost any retirement investment or asset, couldnt they?  Every asset and its purchase, holding and sale has lots of implications and concerns/issues.

Sure, but as I pointed above, we are talking about a (a) non-diversified (b) volatile and (c) illiquid investment here. And once you liquidate it, you will have all kinds of other issues related to selecting and buying a new place, moving, etc, which we will be progressively less inclined (to be polite) to handle as we get older. Thankfully, there are ways of alleviating the situation without exposing yourself to these uncertainties, e.g. reverse mortgages, but I am not sure they have fully trickled down through the collective subconcsiousness yet.

With that in mind, you exclude it from any planning and dont consider it when investing millions of dollars?

Looking at my calculations, I see that I count on 45% of the current market price of the house if I am to sell it within 3 years and move to a less expensive area (Plan A). On the other hand, if I end up staying in the house for another 10-15 years (Plan B), then I lower the number to ca. 30% since it's hard to predict what the house will be worth 13-18 years from now and how much a new place will cost me.

 

[mathjak107]

a reverse mortgage is really a balloon payment loan in disguise...its a balloon payment due either when you sell your house or when you die...nothing new or exciting here,or even useful at that

 

[cute fuzzy bunny]

Ah.. there it is - post by ESRBob where mentions what I assumed was your nom de plume: p. 243 of his book, he states.

Ah yes, I remember that post...I havent read Bobs book, so it didnt stick. Fine, "ted" is is. My wife really hates Cati though. She's filing for a name change.

Now, is that a step up or down from the infanticide charge?

nm

Sure, that's very common, but the interesting question is how did we first arrive at the answer that we "already know", which we then rationalize after the fact? This is a causal world after all It could be hidden self-interest or "nature" or "nurture", but whatever it is, it's real and usually worth looking into.

This is why I call them 'hairballs' and looking into them is something I really enjoy. I often learn something when asking questions about peoples decision making matrices. They're complex intellectual, emotional...and/or sometimes physical claptraps, the origin of which probably cant be determined. In this case, theres probably a consolidated ground up parental, religious and educational influence about the home being a separate thing, sacred, not to be touched.

The easiest and my most common example is an investor born in the depression era and equity investing. Many of those folks grew up in an environment where stocks were evil and a lot of the economic suffering they experienced both directly and indirectly shaped their lives. You strike up a conversation with one of these folks, maybe a parent or grandparent, and talk about buying equities. They immediately respond to the negative, even though there are no facts in evidence about which equities, whether they're good investments, or any other information. You've poked the hairball and gotten a factless response. Further facts will not change the response.

In the working world, I used to exploit a common hairball and the majority of people using this board will understand it. You need a faster, better computer and the new ones have really cool features that the one you have doesnt have. You want it. You know you do. Now, the one you have, and probably the one before that, were perfectly well suited to what you're doing and the new one really doesnt buy you anything.

Whats my interest in this? Trying to help people understand that they have these 'hairballs' and to try to help them find ways to not let them interfere with their early retirement, planning and investing.

Unfortunately, when you ask questions of peoples intentions and motivations (prodding the hairball), many people react quite unpleasantly. The rational, conscious portion of the mind really doesnt like having the subconscious disturbed. The conscious mind has already come to terms with that screaming monster and built a construction of 'facts' and a set of information that both can live with, and you're disturbing the domestic peace.

They usually call you fairly unpleasant names, presume you have some evil intent, or are trying to beat them up.

Its easier to make the hairball prodder into the bad guy than it is to examine the alternatives and perhaps re-rationalize. After all, i'm just some jerk that likes harassing people, wants others to agree with my point of view and thinks baby killing is a-ok.

The typical situation in this case when a hairball is being threatened is to take a relatively irrelevant or unrelated comment from a post and decide to attack that point, as it doesnt threaten the hairball. Often people dont even agree with the argument they're posing or the point they're making, but it does make for a good distraction. See my sig.

A big hairball is someone who "is" their idea. You challenge the idea and you've challenged the person themselves. I've run into plenty of those folks. You become satan himself the moment you point out the gaps in their well thought out plans.

I'll bet most people I get into these 'discussions' with dont even read any of the posts I write in any kind of detail. And thats fair because they really arent interested in my explanations. They've already determined that I'm threatening them, what my next reply will be, and how to escalate the offense/defense to make me stop poking the hairball.

Sure, but as I pointed above, we are talking about a (a) non-diversified (b) volatile and (c) illiquid investment here. And once you liquidate it, you will have all kinds of other issues related to selecting and buying a new place, moving, etc, which we will be progressively less inclined (to be polite) to handle as we get older. Thankfully, there are ways of alleviating the situation without exposing yourself to these uncertainties, e.g. reverse mortgages, but I am not sure they have fully trickled down through the collective subconcsiousness yet.

This is turning into a repeating/recycling discussion. Many investments are non diversified, volatile and illiquid. Yet they get no special treatment. The same folks who will argue that you cannot include the primary residence as an asset, incorporate it into net worth or consider it in any financial planning may own other pieces of real estate or REITS and include those, or own other large assets that are non-diversified, volatile and illiquid and have no issues with throwing those right into the net worth.

I can sell my primary residence or mortgage it (no reverse needed) for a lump sum. In the latter I dont have to move or do anything at all. Hell, the bank will even send a notary over to my house with the paperwork and direct deposit the funds into my checking account. I can sell my primary residence, rent a house next door or down the street, and pay someone a couple of thousand bucks to move all my stuff. Certainly not a pleasant experience for many, but not exactly walking the plank. Heck, in some states its more work to sell an old car and buy a new one than it is to sell a house and pay a mover.

Let me give you an example. You've got a $2M equity portfolio and a $500k paid off house. Your equities drop 80% and the market outlook for the next year or two doesnt look good. The checking account and emergency cash supplies are almost exhausted. Do you take a mortgage on your paid off house, rent a room, sell the house and rent it back or move, or sell your severely depreciated equity assets?

Minus the "home is sacred and not part of my planning" hairball, you probably dont do the last one. It probably makes the least financial and economic long term sense. The other options may have more complexity and more emotional issues wrapped up in them, but they're probably better ideas with the long term in mind.

Further, I think some people will work for 3-5 years longer by holding their home equity aside from the rest of their assets, because of the 'home is sacred and not part of my planning' hairball. Is that in their best interests? Perhaps not.

And no, i'm not saying you should plan to sell or mortgage your home as part of any primary plan or mindlessly consider it just another xxx dollars in your portfolio. Just acknowledge its existence as an asset, incorporate what it is and how it behaves as an investment into your planning, at least at a macroscopic level, and recognize that its at least a fallback option if your primary plans fail.

Defeat your hairball...its rather liberating. I sure as hell cant do it.

 

[ladelfina]

In these parts there is a different animal from the reverse mortgage. It's called the "nuda proprieta'" (literally the "naked property"). Try to put the "naked" part out of your mind because the transactions usually involve very elderly women.

Rather than getting a mortage with a bank and paying interest, what happens is that the elderly person who wants to stay in their home, but needs cash, sells the property outright at a discount to market rates, and retains the right to live in the property until death, at which point the owner can move in or do whatever else they might want with it. At least with this system you don't have the worry of outliving your mortgage term..

It's kind of ghoulish to look at the ads for these apartments, since the prime selling point (the advanced age of the owner-occupant) is prominently displayed: "Nuda proprieta'  95-YEAR OLD.. in XYZ street... 2 bedrooms ..115 m2... etc."!!!

 

[Sarah in SC]

CFB,
Thank you so much for the "hairball"!
That was worth more than you could imagine. In fact, it occurs to me that the succinct, simple, reasonable explanation you just provided and the underlying psychology of the "hairball" were so illuminating, that I owe dory some money. Paypal here I come.
Sarah...who has seen a lot of hairballs...

 

[ladelfina]

Yes! Love the hairball!
I see a book deal, á la Dr. Phil:

Love Me, Love my Hairball

Master your Inner Hairball

The 7 Hairballs of Highly Effective People

and the bestselling Who Moved My Hairball?

 

[astromeria]

How about MSNBC's Hairball, with Ted "Cute" Fuzzy Bunny
hmmm, he might not yell enough to get his own show.

 

[cute fuzzy bunny]

I rarely yell. Its not particularly productive.

Good article where actual scientists and people who may have gone to medical school evaluated hairballs in politicians.

http://news.softpedia.com/news/Poli...-letting-the-facts-get-in-the-way-16848.shtml

If you dig into google a bit, you'll see a boatload of pretty detailed studies that show how people evaluate data and make 'decisions', and how they subsequently react to threats to those decisions.

My own googling led me to this very insightful analysis of the report.
http://www.i-leadonline.com/2006/01/dont-confuse-me-with-facts.asp

 

[shiny]

In these parts there is a different animal from the reverse mortgage. It's called the "nuda proprieta'" (literally the "naked property"). Try to put the "naked" part out of your mind because the transactions usually involve very elderly women.

Rather than getting a mortage with a bank and paying interest, what happens is that the elderly person who wants to stay in their home, but needs cash, sells the property outright at a discount to market rates, and retains the right to live in the property until death, at which point the owner can move in or do whatever else they might want with it. At least with this system you don't have the worry of outliving your mortgage term..

It's kind of ghoulish to look at the ads for these apartments, since the prime selling point (the advanced age of the owner-occupant) is prominently displayed: "Nuda proprieta' 95-YEAR OLD.. in XYZ street... 2 bedrooms ..115 m2... etc."!!!

In the US that is called "reserving a life estate". A person sells the property, but reserves the right to use it in his or her lifetime. The age of the person (and therefore the amount of time they will probably live) determines the value that would be subtracted from the price.

I wonder if these will ever become more common here. Now it is generally something done between family members. Interesting!

 

[Martha]

My own googling led me to this very insightful analysis of the report.
http://www.i-leadonline.com/2006/01/dont-confuse-me-with-facts.asp

I liked some of the comments people made in response to the analysis. For example:

On the political side of things, it is disheartening to see the polarization between parties. To some degree both parties suffer from this, but perhaps even more so the Democrats. . .

Even when thinking they are being balanced, biases come out.

 

[Nords]

Ah yes, I remember that post...I havent read Bobs book, so it didnt stick.  Fine, "ted" is is.  My wife really hates Cati though.  She's filing for a name change.

Ah.. there it is - post by ESRBob where mentions what I assumed was your nom de plume: p. 243 of his book, he states.
Sorry -- CFB it is.

TH is too polite to dredge up old news, but "Ted" has a bad connotation around here...  http://early-retirement.org/forums/index.php?topic=564.msg6463#msg6463

This is why I call them 'hairballs' and looking into them is something I really enjoy.

Just because I'm paranoid doesn't mean you're not out to get me!!

To paraphase Peter Lynch's investing advice, if an idea can't be succinctly explained & defended to a bunch of strangers on an Internet discussion board then it's probably not worth executing...

**BREAK**

At the risk of ending up back on topic, perhaps home equity is a retirement solution.

A reverse mortgage certainly ain't cheap with its 2% financing/closing costs, but it does provide an approximate estimate of a monthly cash flow which, if I remember correctly, will last as long as the homeowner is alive. A reverse mortgage doesn't end when the home equity is consumed, it ends when the homeowner dies. Afterward it's just a debate over whether the home is turned over to the mortgage holder or sold to pay off the debt. If the owner lives to be 115 years old then it's a great deal for them. If the homeowner dies a few years after starting the reverse mortgage then it's a bad deal for them.

It's the same as an annuity-- the buyer shells out a chunk of cash for "lifetime income" and the hopefully reasonable insurance assurance that the payer will live up to their side of the bargain.

I'm not a fan of annuities or reverse mortgages. In this situation, personally I'd take the money from the sale of the home and run away fast.

 

[HFWR]

To paraphrase Jerry Reed, I've got a house that's mine alone, that me and the finance company own...

Not living in a bubble area, I'd have to move to a pretty crappy "modest" home and area to reap much benefit from my equity. Of course, I have only around 30% equity, or say $35k (excluding the costs of selling, moving. etc.). I do consider it an asset, in that I own at least some of it, but other than having a relatively nice home in a reasonably nice "hood", and having a 5.5% fixed mrt that should keep my payment low relative to inflation, it's not really an "active" part of my investment portfolio, and surely won't facilitate any step function improvements in my retirement...

 

[donheff]

lution.

A reverse mortgage certainly ain't cheap with its 2% financing/closing costs, but it does provide an approximate estimate of a monthly cash flow which, if I remember correctly, will last as long as the homeowner is alive. A reverse mortgage doesn't end when the home equity is consumed, it ends when the homeowner dies. Afterward it's just a debate over whether the home is turned over to the mortgage holder or sold to pay off the debt. If the owner lives to be 115 years old then it's a great deal for them. If the homeowner dies a few years after starting the reverse mortgage then it's a bad deal for them.

I hope some banking types will clarify but I believe that when my in-laws got a reverse mortgage it was set-up such that they get a stream of income for life and if they die before all of the equity is exhausted their estate receives the balance of equity after sale minus some (probably exhorbitant) fees. I think, like annuities, you can choose among a number of different approaches.

 

[Rich_by_the_Bay]

TH is too polite to dredge up old news, but "Ted" has a bad connotation around here...  http://early-retirement.org/forums/index.php?topic=564.msg6463#msg6463

Oooh. Nasty stuff.

So, "TH??" -- who's that?

 

[cute fuzzy bunny]

So, "TH??" -- who's that?

Some 45 year old a-hole with nothin' better to do...

 

[Nords]

Some 45 year old a-hole with nothin' better to do...

Sorry, with this board's demographics you're gonna have to be more specific than that!

 

[HFWR]

Not too be confused with 51yo a-holes...

 

[cute fuzzy bunny]

Sorry, with this board's demographics you're gonna have to be more specific than that!

The one sitting in the house because its 115 degrees outside and the air conditioner hasnt stopped running for 3 days.

Heyyy...i'm looking forward to being a 51 year old a-hole. Just six more years and counting. Its my b-day in a couple of weeks!

 

[brewer12345]

I hope some banking types will clarify but I believe that when my in-laws got a reverse mortgage it was set-up such that they get a stream of income for life and if they die before all of the equity is exhausted their estate receives the balance of equity after sale minus some (probably exhorbitant) fees.    I think, like annuities, you can choose among a number of different approaches.

If memory serves, with a RevMo, the mark borrower can get a lump sum, an annuity/stream of payments, or a line of credit.  A popular way to rack up big, fat commissions structure payments is to take the sucker's Grandma's RevMo proceeds and use it to buy an annuity from a life insurer.

 

[HFWR]

The one sitting in the house because its 115 degrees outside and the air conditioner hasnt stopped running for 3 days.

Heyyy...i'm looking forward to being a 51 year old a-hole.  Just six more years and counting.  Its my b-day in a couple of weeks!

Yeah, I'll soon be a 52yo a-hole...