benefits of a reverse mortgageFor Americans moving into retirement who are cash poor, but home rich, it may be a mistake not considering tapping into their home equity, according to a recent article from CBS News MoneyWatch.

A large number of Americans hold the bulk of their assets in their home equity. In all, Americans have more than $12.5 trillion in home equity, according to the Bipartisan Policy Center (BPC), which recently issued a report spotlighting the importance of housing wealth in retirement planning.

A common mistake among Americans is that they are taking out home equity loans while they are still in the workforce and using the funds immediately. This could deplete the equity in the home that could be used to tap into retirement in the future, the article explains.

Preserving home equity to use in retirement is a strategy suggested by the BPC report, especially for those people who may not have saved enough over their working years for retirement.

Reverse mortgages are brought up as a potential way to tap into home equity. There are several ways a reverse mortgage can be used to help secure retirement. Retirement researcher Dr. Wade Pfau gives some suggestions.

A borrower can elect a monthly payment for life; receive a monthly payment for a fixed term take a lump sum payment to retire other debt; elect for a reverse mortgage line of credit that’s only tapped into if retirement savings are depleting; or use invested assets to cover regular monthly living expenses and tap the reverse mortgage to cover monthly living expenses when savings are depressed due to stock decline, the article writes.

It is pointed out that if there is sufficient amount of home equity being worked with, the borrower can combine certain strategies to optimize the results and make it work for their specific situation.

Whichever option borrowers choose, they must be sure to educate themselves before jumping right into a decision.

Read the full article from CBS News

Written by Alana Stramowski