The family home has traditionally been the greatest asset for most Americans. Your home shelters and protects you against all kinds of storms — literal and metaphorical ones included. That’s especially true considering that your home can offer you financial stability later in life by acting as a source of home equity for retirement income.
There are many options for how to use home equity in retirement. Home equity loans for seniors are one possibility. In many cases, other lending options may be more appropriate, such as reverse mortgages and home equity investments (HEIs) that require no monthly payment. We’ll cover each of these options in more depth to help you understand which — if any — may be worth investigating further.
Understanding home equity
In order to see how you can use home equity for income, it might help to take a quick refresher on what home equity is. Simply put, home equity is the value of your home minus any debts attached to it, such as a mortgage. For example, if your home is worth $300,000 and you owe $100,000 on a mortgage, you have $200,000 of home equity, or 66%. In other words, it’s the amount of your home that you own, debt-free. Most home equity products allow you to borrow up to 80% to 90% of your home’s value minus any other debts, including the funds you’re about to borrow.
How to use home equity in retirement
One of the biggest advantages of using home equity for retirement income is that you have total control over how you use the funds. However, some types of home equity financing, such as reverse mortgages, may require you to pay off any remaining mortgage debt you have. Recommended options for how to use home equity in retirement often include things like:
- Paying for healthcare expenses
- Remodeling your home to age in place
- Moving into a new home or long-term care facility
- Paying off higher-interest debt such as credit cards
- Supplementing your monthly income for living expenses
The advantages and disadvantages of using equity in retirement
The majority of seniors are reluctant to use their home equity when it comes to financing aspects of their retirement, according to a 2017 Center for Retirement Research paper. There can indeed be significant downsides to consider, but if homeowners plan for these disadvantages, there is often just as much — if not more — to gain.
Advantages
- Tax benefits: You may be able to write off the financing charges on home equity debts when you use them to renovate your house, although it’s best to consult with a tax professional to be sure.
- Flexible funds: You can use the funds for whatever you want, with a few notable exceptions, such as paying off your first mortgage with reverse mortgage funds.
- Lower interest rates: Unsecured debts such as credit cards and personal loans typically charge higher interest rates than debts secured by your home.
- Different product options: There are many types of home equity financing options in addition to home equity loans for seniors, such as reverse mortgages, HELOCs, or HEIs.
Disadvantages
- Fee heavy: Vetting your home and setting up secured financing takes more work than unsecured debt, and may incur higher upfront costs as a result.
- Impact on heirs: Some products, such as HEIs, make it easy to leave your home to your heirs. Other products, such as reverse mortgages, may make it harder.
- Monthly payments: Some — but not all — home equity products require monthly payments, which can be increasingly likely to strain your finances as you get older.
- Market fluctuations: Some home equity products charge variable interest rates, which can affect how much you have to repay, as can changes in home values over time.
- Risk of losing home: The biggest threat for most homeowners – you could lose your home if you default or trigger repayment, such as by moving out of your home with a reverse mortgage.
- Credit and income qualifications: Home equity products may require a strong income and good credit to qualify — two things that can be in short supply for many retirees.
Ways to tap your home equity in retirement
You may be familiar with some types of home equity financing, but there are at least half a dozen available options for tapping into your nest egg. Each of these may serve different types of homeowners better and deserves careful consideration.
Home equity loans
Home equity loans allow you to take out a lump sum against your available home equity. You’ll then repay it with fixed monthly payments over five to 30 years. They’re a great option for homeowners looking to finance a single large expense, such as a home remodel for aging in place, and who have the funds to make payments on the loan.
Home equity lines of credit (HELOCs)
HELOCs are similar to home equity loans but are available as a line of credit that is typically split up into two periods. During the initial draw period, you can borrow money as needed while making interest-only minimum payments over the course of five to 10 years. After that, it’ll transition into a repayment period where your access to funds stops and you begin repaying the debt for 10 to 20 years.
This offers a flexible way to borrow money only when you need it — especially handy for newly retired folks settling into a different lifestyle — but interest rates (and therefore payments) can be variable and you may incur annual fees.
Cash-out refinances
You may be able to take out a refinance mortgage for a larger amount than you currently owe, receiving the remainder as a lump sum of funds that you can use for anything you want. A cash-out refinance can be a good option if you can secure a lower rate on your new loan than what you’re currently paying. However, you’ll need to be cognizant of higher monthly payments for the next 15 to 30 years as you reset the progress you’ve made on your current mortgage.
Reverse mortgages
Reverse mortgages are tailor-made for people aged 62 and over. Chief features of reverse mortgages include no monthly payments and special protections for spouses who may continue living in the home after you pass away, even if they’re not listed on the loan. You can opt to receive funds in many ways, such as with a lump sum or monthly ongoing payments to supplement your income.
While your loan balance will continue to grow over time, you will never have to repay more than your home’s value. Repayment is triggered when you permanently move out of your home, sell it, or pass away. Your heirs may receive special benefits in purchasing the home if they can afford to do so; otherwise, the home will be sold to repay the debt.
Downsizing
The most viable option for many homeowners is to sell their home and downsize, especially if any potential heirs can afford to purchase it. Not only does this provide a lump sum of funds that you can use to transition into a smaller home or even a long-term care facility, but it can reduce your monthly household expenses as well since you won’t be responsible for upkeep on a larger home. If your heirs can’t afford to purchase the home or if you want to retain ownership, another option is to hire a property management company to rent out your home for you, while you receive the profits as steady income.
Home Equity Investments (HEIs)
If you don’t want to make monthly payments but you don’t like the ever-increasing loan balance that comes with a reverse mortgage, consider a Home Equity Investment (HEI). These products are offered in 30-year term lengths, with lump-sum funding. Instead of interest, HEIs charge a percentage of your home’s future increase in value.
This means it’s impossible to compare your true financing costs with other financing options because no one has a crystal ball to see how much appreciation your home may experience, but on the flip side, you may end up paying less too if market changes cause your home value to decline. Furthermore, your heirs can assume your HEI more easily than qualifying for a new mortgage, so it may be easier to leave your home to your loved ones.
Frequently asked questions
Should you use home equity for retirement?
There isn’t a one-size-fits-all answer to whether home equity loans for seniors or any other equity product is a good idea. It depends on many factors, such as your age, the amount of equity you have, your potential expenses, your family situation, etc. Home equity products can be risky but also rewarding, and a good certified financial advisor can help you make an informed decision.
What happens to mortgage debt if I pass away?
There are many federal and state rules and regulations governing what happens to mortgage debt when someone passes away. If you had a cosigner on your mortgage or if you leave the title of the home to someone in your will, that person can continue paying the mortgage and keep the home. If they can’t afford to do so, or if you pass away without any heirs, your home may be sold to repay the loan.
What are other ways to boost my income in retirement?
You don’t have to commit to going back to work full-time to boost your income in retirement. Common options for many retirees include picking up a part-time job, starting a small hobby business or side hustle, and making sure you’re eligible for all potential entitlements and benefits.
Final thoughts
Determining whether using home equity for retirement income is right for you or not — or indeed, even the best type of home equity product to use — is an important decision. A good fee-only financial advisor can help you wade through your full suite of available options to fund your retirement. For many homeowners, home equity makes up an important part of enjoying their finest years.
