Your house: Breaking the bank

Why it may not be such a wise idea to use your home as a source of funds.

By Amanda Gengler , Money Magazine writer-reporter

NEW YORK (Money Magazine) -- If you've been reading Money Magazine for any length of time, you surely get that saving for retirement should be your top financial priority. Even so, the past decade's easy appreciation in home values has made such fundamental advice seem, well, a lot less urgent.

Or so suggests a National Bureau of Economic Research paper recently published in the Journal of Monetary Economics. Comparing results from the biennial University of Michigan Health and Retirement study, researchers found that, excluding home and business equity, 51- to 56-year-olds hold less wealth than the same age group did in 1992.

Home Equity Loan
$30K HELOC 3.56%
$50K HELOC 3.73%
$30K Home Eq 5.22%
$50K Home Eq 4.92%
$75K Home Eq 4.92%

Find personalized rates:

Rates provided by

"These boomers look richer, but a lot of that wealth is because one asset [their house] revalued," says co-author Annamaria Lusardi, a professor of economics at Dartmouth. "Excluding housing, people have very little in other wealth components."

The study did leave out 401(k) savings, but the median balance for those accounts for a similar age group is only $50,000, while fewer fifty can look forward to guaranteed income from pensions today than could in 1992.

Myth: My home is a sure investment

The results call for a reality check: Are you banking too much on your house?

Truth: Your home value may have more than doubled during the boom, but real estate markets have also been known to suffer prolonged stagnation, even downturns (see the 8 percent drop in median prices this past year in some areas).

If there's a bust on the cusp of your retirement, your pot of gold could turn up half empty. Besides, the past 10 years aside, history suggests that homes don't give much long-term return compared with other investments: A dollar invested in residential real estate in 1963 has barely outperformed a low-risk T-bill, according to a 2007 Fidelity Research Institute report.

Myth: Downsizing will leave me flush with cash

Truth: Even if the market is up when you're ready to exit the work force, you're unlikely to ever see the appreciation in cold hard cash. Prices on smaller homes jumped too during the boom. In Baltimore the median price of a single family home is $278,800; a condo is $239,300. Savings: less than $40,000.

Unless you move to a less pricey area - think San Francisco to Omaha - "you're unlikely to greatly improve your financial picture," says financial planner Jim Sonneborn of Chatham, N.J.

Myth: I can always tap my equity and invest it for even better returns

Truth: Interest rates are up, with average home-equity loans and lines of credit topping 8 percent. So the hurdle is higher. Earning average stock-market returns above 8 percent will require years of riding market ups and downs, time you probably don't have.

As for reinvesting the funds in your home, the days of making it all back are over. A kitchen redo recouped 80 percent on average in 2006, according to Remodeling magazine.

The bottom line: Saving for retirement is still Job No. 1. Your home may provide a roof over your head in retirement, but you'll need cash if you want to eat. Top of page