What’s the best way of using your home equity during retirement?
If you're nearing retirement age, you likely have big questions about the future. Will your current nest egg survive market turmoil? What will the cost of healthcare look like in ten years? You may even be wondering how you can use home equity in retirement.
While no one has a crystal ball that can answer all these questions accurately, there are some standard facts surrounding home equity and your financial possibilities. For even those who haven't paid their home off in full yet, the rise in overall home equity provides some cushion to hedge against inflation and get you better prepared for the life you want to live after 65.
Even if you’ve never explored any of the following, these home equity options are worth investigating to help you endure any financial uncertainty as you enjoy your older years.
How will you use home equity in retirement?
There are more financial solutions available now for homeowners than ever before, with each option varying in risk and the work involved to make it happen. Just as important as knowing how each solution works, however, is the plan you have for the funds once you get it. You may find that you need more money up front to help pay for things like large medical bills or home repairs. You may also choose to stretch out cash proceeds for basic monthly income needs as you age. Still, some people find that they need both options – a big chunk today and a way to draw on income over time.
Before you research any of the following, ask yourself the following questions:
1. What are my immediate financial needs, and how much will they cost?
2. Do I anticipate my bills increasing over time? Or do I have a plan to reduce expenses as I age?
3. How much work do I want to do for extra income? Am I looking for a truly passive source of money, or am I up to the challenge of some sweat equity?
Be honest about your lifestyle and how it may change. If you anticipate health or mobility issues, factor these into monthly expenses or your willingness to commit to home upkeep. Anticipate the outsourcing of things like home health services or remodeling to cost more than if you could manage them yourself. Include these new costs in your future budget.
The best home equity options for you
Ready to explore the possibilities for putting your house’s value to work? Here are the ways other retirees are getting cash in hand to pay down debt or build their personal finance futures:
1. Renting out property
This option is best for motivated homeowners who like to dabble in DIY or have a move-in-ready room or floor level to share with responsible renters. Ideas for using your home include short-term rentals, vacation stays, and getting a permanent roommate. This tactic allows you to keep all the equity in your home, but there will be additional costs. If you struggle to pay bills and have no money for an investment property, or you don’t see yourself taking on landlord duties in your older age, this may not be the approach for you.
Best for: those eager to start a new phase of their business life.
2. Downsize your home
If you owe less on your home than its value, and you live in a market with reasonable real estate values, you may like the idea of selling your home and moving into a more modest abode. The cash difference can help set you up for the increasing cost of healthcare, home services, or even an inheritance for your children. This option requires significant upheaval to your life, however, as you will be going through the motions of finding a new home, selling your existing home, and then downsizing all of your belongings. This isn't an ideal arrangement for those who love their current home and want to age in place
Best for: those who want to make a move.
3. Turn your equity into cash
After reading these suggestions, you may be closer to answering the question, "How can I use my home equity in retirement?" In the end, it's a very personal decision, one that will require you to know your current financial situation and your ultimate retirement goals. Having a good sense of your future needs is helpful but not required, and – to be honest – do any of us know what will happen later in life?
Thankfully, many market options let you turn your equity into cash. Let's explore them:
HELOCs: Similar to a credit card, a HELOC Home Equity Line of Credit) is a revolving fund that allows you to access cash up to your given limit, and replenish your funds as you pay down your balance. Unused funds are not charged interest, so many people tend to hold a HELOC as a discretionary emergency fund. Moreover, HELOCs tend to have lower closing costs, making them an attractive alternative compared to other sources of funding.
Fraction Mortgage: This new financing option from Fraction lets you borrow up to 50% of your home's equity at a low rate. Then, choose to repay monthly or not; the first ten years' payments can be postponed until you're ready. This option is available to all ages, so you don't need to wait until 62 to access your cash. Use it to create a revenue stream in retirement, fix up your home, or consolidate more expensive credit card bills and smaller loans. The variable rate is low and can’t go above a capped amount, leaving you free to plan for an uncertain market.
Reverse Mortgage: Available to those 62 and older, you’ll need significant equity in your home to qualify. A reverse mortgage can give you a lump sum when you need it, just like a HELOC, but the total balance is due when you move, sell your home or pass away. There are rarely rate caps, so the market may make this option more expensive over time, and prepayments may be subject to expensive penalties. Several reverse mortgage products are being sold today, so understand how even they can differ from one another.
Cash-out refinance. If you’re open to taking out a brand-new mortgage for the entire value of your home, a cash-out refinance could work for you. You get to stay in your home, take advantage of lower rates, and use the difference in monthly mortgage payments as a lump sum payout. Be aware, however, that this causes you to start completely over in the paying off of your home. If you don’t want to start the homeownership debt journey from square one this late in life, other options might be more suitable.
HELOC, Fraction Mortgage, reverse mortgage, and cash-out refinancing work in different ways, but they provide you with a lump sum payment. With cash in hand, you can also take advantage of the first two options on this list. The home equity loan proceeds can be used to either build that new garage apartment you want to turn into an Airbnb or to put a down payment on the retirement condo you’ve had your eye on. While it’s true that renting out property and downsizing both often require a little free cash to get started, you can overcome the obstacles with home equity loan proceeds.
Best for: those who want to stay in their home and enjoy a flexible cash resource for whatever comes up.
Ready or not? How to use home equity to steady my income
By at least investigating the options, especially the more flexible home equity loan, you are better prepared to access your home equity for cash in a pinch. Remember, life changes can happen fast (really fast), and if you need to get your hands on money for a health emergency or to address another urgent situation, it's nice to know that options like home equity loans are there when you need them.
Doing some of the groundwork now can help make getting money for retirement easier later on. Start by researching what's available, the paperwork you'll need to file, and how payments can eventually fit into your retirement budget. Then, when you're ready to make a move, you'll be that much closer to using your home equity for whatever your retirement life throws at you.
Interested in learning how you can convert your home equity into cash? We can help. Get in touch with a Fraction team member today.