IS YOUR HOME MORE

than just where your heart is? Is it also your retirement nest egg? Banking on your home's equity is a risky but increasingly common proposition, especially with so many baby boomers now on the cusp of retirement.

A recent study commissioned by Oakland, Calif.-based Bell Investment Advisors, found that seven out of 10 60-year-olds consider their home part of their retirement plan. Of that group, almost one in five 24% to be exact said their home's equity represents half or more of their total savings.

Surprisingly, this is a snapshot of the considerably well-off: The survey questioned investors with at least $1 million in investable assets and that's not counting their homes. The state of "average" soon-to-be retirees, however, doesn't appear to be much different from their richer peers. Other than Social Security, which represents 42% of household wealth among baby boomers, the home is the single largest asset that the Average Joe has, accounting for 21% of their total net worth, according to the 2004 Survey of Consumer Finance, the latest available. Back then, home equity was nearly three times the size of what the household held in defined-contribution plans, such as 401(k)s or IRAs. And given the run-up in home prices during 2004 and 2005, chances are the home's share of family wealth has grown even more.

"The boomers are really the ones who have seen the most appreciation in their homes," says Diahann Lassus, a certified financial planner (CFP) in New Providence, N.J. But while watching your house double or even triple in value is rewarding, betting on that value can be equally risky.

That's because turning home equity into a pile of cash is far from easy. Traditional ways to tap equity home-equity loans, lines of credit or cash-out refinance loans are rarely a smart decision for folks on a fixed income because they need to be repaid. Thanks to a run-up in condo prices, downsizing could leave you with less profit than you planned. And reverse mortgages, increasingly touted as a great solution for retirees, are rarely a good fit.

Here are some inconvenient truths about the wealth locked into your home and how you can use it in retirement.

Future gains will be unremarkable

It's widely known that real estate does appreciate. But what's always easy to forget, especially during this past housing boom when median home prices were up nearly 50% nationwide and exponentially more in many local markets is just how unimpressive that appreciation ends up being over the long run. The median price of new homes in the United States has gained an average annual 5.9% since 1963, only slightly better than the returns of low-risk Treasury bills over the same period, according to the Fidelity Research Institute. Factor in inflation, and your average gains are only 1.35% a year, compared with 5.95% (after inflation) for equities.

Wealth holdings of a typical household prior to retirement

*:

Social security: 42%
Primary house: 21% of total wealth
Defined benefit plan: 16%
Defined-contribution plan: 8%
Financial assets: 7%
Business assets: 2%
Other nonfinancial assets: 4%

* Households headed by individuals aged 55-64. Source: Survey of Consumer Finances 2004.

To be sure, this appreciation is based on new-home prices and doesn't factor in improvements made by homeowners that increase the home's value. Neither does it take into account equity buildup or the tax break on mortgage interest and capital gains. But while the benefits of homeownership are undisputed, so is the fact that you can no longer bank on your home appreciating at the crazy rates of the housing boom.

Recent housing market gains will also see significant corrections in many areas across the country. "We have been counseling our high-net-worth clients to ignore or significantly discount the equity that they have built over the last several years," says Tom Zimmerman, a CFP in Evanston, Ill. Just ask the folks in Sarasota, Fla., where prices in the second quarter of this year were 15% lower compared with the same period in 2006, or in Cleveland and Detroit, which registered a 7% decline. Such sharp drops aren't without precedent. Between 1980 and 1981, real-estate values dropped 19.2%, according to the Fidelity Research Institute, in the early 1970s and 1990s, prices fell roughly 13%.

Going smaller is getting tougher

Downsizing to a smaller, less expensive home is one of the most common ways in which future retirees plan to tap their home equity. But in reality that may not work out quite as planned. "Many folks say 'I'll move to something smaller when I retire,' but something smaller doesn't necessarily mean cheaper," says Lauren Lindsay, a CFP with Personal Financial Advisers in Covington, La.

Problem is, even if you live in an area that has seen large real estate growth, the amenity-rich condos you have your eye on are likely equal or even higher in price than your previous home. "A lot of my clients who retired and sold their homes moved into a maintenance-free community that costs as much as, if not more than, their older, large-maintenance house," says Sheryl Garrett, founder of the Garrett Planning Network, a nationwide network of fee-only financial planners. "Low-maintenance condos are what everybody's after these days."

Indeed, the median condo price was $230,600 in July 2007, according to the National Association of Realtors, an industry group, slightly higher than the $228,600 median price for single-family homes.

That's not to say that downsizing is impossible, but you'll have to compromise on the location and amenities, Garrett says. At a recent workshop, a 62-year-old woman asked her how best to retire on her $150,000 401(k) balance and the $600,000 equity in her San Diego home. "I rubbed my chin like I was thinking very hard and said: 'Move to Kansas,'" Garrett says. "After everyone stopped giggling, I told them I actually meant that seriously."

Then there's the matter of selling your current home, which may take longer than you thought. "In planning, make sure you give room for a sale that could take upwards of 18 months to two years," says Sharlee Cretors, a CFP in Scottsdale, Ariz.

Reverse mortgages can be a bad fit

A reverse mortgage can be an easy way to use your home's equity if you're a good candidate, that is. For the time being, very few people are, says Karen Schaeffer, a CFP in Rockville, Md.

For more details, read our Guide to Reverse Mortgages

One of the main drawbacks of this arrangement is the owners have to live in the home and maintain it, which becomes more difficult and expensive as they age, Schaeffer says. On top of that, the costs associated with reverse mortgages are high, roughly 6% of the home's value. Although costs are starting to come down as more lenders start offering this option, most folks are better off moving, Schaeffer notes. And since the payments are based on a number of factors, including your life expectancy, younger retirees shouldn't expect a windfall. A 63-year-old owner of a $200,000 home, fully paid off, could expect barely $500 a month with a Home Equity Conversion Mortgage (HECM), the most popular reverse mortgage product. But for an 83-year-old applying for a mortgage at the same time, the payments would be double. (To crunch your numbers, use the reverse mortgage calculator at ReverseMortgage.org

If anything, think of a reverse mortgage as the end of your financial rope, Lassus says. "If you're older, in your 70s or 80s, and want to stay in your home and are determined not to sell, then a reverse mortgage is something you may want to look into," she says.