It’s often said that a home is one of the best investments you can make in your lifetime. For many consumers, their home is the largest asset they have. This house can act as their retirement savings, or provide them with inexpensive living once they are finished paying it off. However, there is one major downfall to investing in a home, it’s simply not a liquid investment.
Liquidity refers to how easy it is to convert an investment back into cash. The stock market, for example, is a highly liquid investment. If a consumer ever needs access to that money, they can simply sell a few of their stocks and have the cash in their bank within a few days. Real-estate is, unfortunately, not very liquid at all. Most consumers save for their retirement for most of their working lives. After they retire, they will need to use their savings to live. If somebody has invested all their money into their home, they need a way to get access to this money. Historically, the only way to do so was by selling the home. Now, retirees are able to access these funds via reverse mortgages.
Why Reverse Mortgages Are Important
Imagine that you’ve lived in the same home for your entire life. Most consumers put 30% of their income towards housing. When it’s time to retire, should seniors be forced to sell their homes just to access their investments? Absolutely not. Selling their home is actually a very inefficient way to access equity. There is no reason to liquidate your assets into a single large, lump sum payment when most people only need a monthly stipend. Plus, there are large costs associated with selling a home, and this can make thousands of dollars seem to evaporate as you pay both your realtor and your legal fees.
How Reverse Mortgages Work
Reverse mortgages are actually quite simple. Generally, you make payments every month towards your home, with each payment contributing towards your equity. A reverse mortgage works in exactly the opposite way. You’ve likely already built up your equity for many years. Instead of cashing out your entire investment, you can receive monthly payments that come out of your equity. Because mortgages are such low interest, this is actually one of the cheapest ways to access your equity on the market.
Why This is Significant for The Economy
After the economic collapse of 2008, the housing market is still in turmoil. Consumers are a little more apprehensive to make such large investments. Finance is one of the largest industries in the united states, and the shrinking housing market is very hard on this industry. Now that consumers can use their homes as more of an investment, we should expect to see sustained growth in this industry for a period of time. We may never get back to pre-2008 levels, but this is absolutely a move in the right direction. All that is needed now is to make consumers more aware of the options available to them, and we will hopefully see growth within the next several years.