You have worked hard your entire life to build equity in your home. Should your home’s equity be a part of your retirement savings, income, or investments.
Savvy seniors are utilizing their homes equity to benefit their retirement in many different ways including:
Are you bullish on home prices continuing to increase or are you afraid that the market is going to collapse. That should be the starting point, your risk tolerance, and your expectations of the housing market as this influences your homes equity. If you believe that the home prices appreciation will continue you can borrow at todays lowest rates, the home value appreciation can grow faster than the rate of which the bank is charging you interest (that’s a good financial move – free money). Interest rates are predicted to increase there isn’t much more room for decreasing at this point, rates are historically low, but when is the main question.
What are my options in retirement for accessing my homes equity.
To release equity in any mortgage program you will have to first qualify. Meeting income, assets, and credit score requirements will be the first step.
You can release equity from your home with a Home Equity Conversion Mortgage aka a reverse mortgage loan. This loan is only available for those who are 62 years of age or older. If you are younger skip to the section on home equity loans and line of credits.
Reverse mortgage proceeds can be selected from options such as receiving a lifetime guaranteed monthly income, a credit line that can grow as you don’t use the funds, and or a combination with a lump sum upfront payment.
The benefits of a reverse mortgage over any other home equity release program include the fact that NO monthly mortgage payment is necessary. If you go with this option you will receive the money as you have selected to be received, without paying any taxes on the funds, and without having to worry about making a monthly mortgage payment. There are some Jumbo reverse mortgages and proprietary options as well. A non-recourse feature of the program makes it safe for heirs, since they will never have to pay back more than what the home can appraise for, in case you borrow over your homes value.
It’s not all positive with the HECM program. The fees are pretty steep in comparison to a HELOC or home equity loan. There are interest rate charges accruing on the balance that you have borrowed, hopefully the homes value increases to offset that cost over time. For seniors who are equity rich and cash poor this is the best option. If you have substantial savings and or annuity income, you may want to consider the HECM credit line or monthly income options.
Home equity line of credit:
This traditional forward mortgage option can allow you to create a line of credit that you can access as you wish. The benefits are that you will only pay interest and fees on the amount of funds you actually touch. This can create a new savings account and or give you access to the homes equity as needed for emergencies or projects. If you want to incorporate an investment like feature consider the HECM credit line as those can grow over time. The funds you do not access have a growth feature which is right now higher than a CD rate of interest (and close to the return from an annuity investment).
Unlike the HECM the HELOC you will have a mortgage payment.
Home equity loan: Need the funds now. Want to receive an upfront lump sum, this is the option for you.
With all the above retirement home equity solutions you will need to continue to maintain the homes property taxes and insurance as you age in place. This is mandatory and not a negative but something you should factor into the costs. If your home is debt free right now and you don’t need the funds, the only option worth exploring is the credit lines. If you have a lot of home equity but desire more income in your retirement consider the monthly guaranteed income from a reverse mortgage loan.
Taking out the lump sum option should be the last option you consider as most people don’t have the ability to manage large lump sums. Avoid Las Vegas if you are planning on taking this route. Avoid making any rash decisions after receiving the lump sum. Do not let friends and family borrow those funds or make any wild investments such as startup investing. Those are all likely ways to blow through that lump sum, leaving you with a mortgage payment or debts.