How to take advantage of the real estate boom if you don't want to move

The booming real estate market has helped many sellers cash out at high prices in recent years. In Canada, home prices rose 21% year over year as of January 2022, according to the Canadian Real Estate Association (CREA). Similarly, in the U.S., median existing-home sale prices climbed more than 15% over that same period, finds the National Association of Realtors (NAR).


But what if you don’t want to sell your home? How can you still reap the rewards of this real estate boom?


The answer for many homeowners is to tap into their home equity, such as by taking out a home equity loan or a home equity line of credit (HELOC). Increases in housing prices mean that homeowners may have more equity than they realize, which can then enable them to access higher borrowing limits.


So, retirees (or those nearing retirement) who are struggling with debt, have trouble meeting monthly bills or simply don’t have as much disposable income as they’d like might benefit from tapping into their equity now. 


Doing so still involves borrowing against your home, so there are certainly risks to be aware of, as you wouldn’t want to lose your home to foreclosure in retirement. But, when used strategically, tapping into your home equity can help you access money for retirement, or perhaps money for an investment, such as if you want to buy a second home.


In this article, we’ll take a closer look at how you can take advantage of the real estate boom, particularly for retirement, even if you don’t want to sell yet.


How can rising home prices help me age in place?


While a hot real estate market isn’t the only time that you can take advantage of the equity in your home to age in place, it often helps. Rising home prices can increase your equity levels without requiring you to pay down your mortgage faster. Even if you’ve paid off your mortgage, higher home values can mean more access to cash.

Suppose a homeowner nearing retirement paid off $300,000 of a home valued at $400,000. If that homeowner tapped into their equity, such as by taking out a home equity loan, perhaps they could then receive $240,000, which is 80% (the maximum in Canada) of the $300,000 they have in equity. 


Yet if the booming real estate market caused the home value to rise over the past couple years to, say, $500,000, then they would have an extra $100,000 in equity. So, that could translate into a home equity loan totaling $320,000. That’s a lot of money that could be used in many ways, such as to:

  • Pay down higher-interest debt so you have lower monthly payments
  • Have a larger financial cushion, such as if your savings were wiped out during the pandemic and you want money readily available for unexpected expenses
  • Diversify income, such as if you want to use some of your home equity as spending money 
  • Make an investment, such as buying a rental property or starting a new business


Plus, some types of loans need to be in a first lien position, meaning you would need to use the new loan to pay off your existing mortgage. So, for some homeowners, rising home prices might be necessary to have enough equity to pay off your first mortgage while still leaving enough to make the new loan worthwhile. 


Of course, you’ll have to eventually pay back the loan; even though you can potentially borrow more due to rising home prices, it’s not as if you’re just being handed free money. And you might not want to take on too much risk, considering you’re borrowing against your home.


Yet an advantage of accessing equity while aging in place is that you might be able to structure the loan so that your home could be sold to cover it when you no longer need that housing. With a reverse mortgage, for example, you might not have to pay back the loan until after you pass away.

So, as long as you weren’t banking on passing your house on to heirs, the proceeds from the sale of your home could cover your loan, while during your retirement years you could access the value that would have otherwise been locked.

Or, perhaps you’ll decide to eventually sell your home and move into a rental later in your retirement, in which case you could still use the proceeds to pay back the loan. Meanwhile, you might be able to enjoy a more comfortable transition into retirement by having access to that money to supplement your income before tapping retirement accounts.


What are the different ways I can access my home equity for retirement?

If you want to tap into your home equity in retirement, you can likely turn to a few different options, such as:

1. Reverse mortgages

As mentioned, one route that retirees or those nearing retirement might consider is a reverse mortgage. For these loans, you have to be at least 55 in Canada or 62 in the U.S. There are different types of reverse mortgages, some with fixed and some with variable interest rates. One of the most common types of reverse mortgages is a home equity conversion mortgage (HECM). With an HECM, you can receive a lump sum and might not have to make monthly payments. Instead, you can repay the loan when you move out, sell the home or pass away.


As with any loan, however, you should be cautious before taking a reverse mortgage.

“Reverse mortgages can be predatory, targeting older adults who are desperate for cash. If your heirs do not have the funds to pay off the loan, that inheritance is lost,” notes an Investopedia article.

2. Home equity loans


Another way to access equity for retirement is to take a home equity loan. Like some reverse mortgages, home equity loans generally provide a lump sum. However, home equity loans differ from reverse mortgages in many other ways. For one, home equity loans typically require monthly payments, as they are essentially second mortgages. But they do not have the age restrictions that reverse mortgages do.


In some cases, home equity loans might be attractive for consolidating debt, as you might be able to pay off higher-interest loans and then pay back the home equity loan for a lower monthly amount. Also, if you want  money for an investment, a home equity loan might provide the lump sum you’re looking for. 

3. HELOCs


Retirees also might want to consider traditional HELOCs if they want to access their equity over time, rather than all at once through a lump sum payout. These credit lines can provide money for retirement on more of an as-needed basis. 


HELOCs can be attractive to retirees aging in place, especially if you can access a large credit line due to having a lot of equity from housing price increases. That way, as your retirement income needs change, you can adjust how much you draw from your HELOC. For example, you might have less investment income some years, in which case you might want to supplement with cash from a HELOC, provided you’re confident you can pay that back later (such as by eventually selling your home).

4. New types of loans


In addition to these traditional options, new ways to tap into equity have also emerged, such as with the Fraction Mortgage. This HELOC draws on some of the best characteristics of both traditional HELOCs and home equity loans, such as by providing a lump sum upfront without requiring monthly payments. Plus, these loans do not require you to be above a certain age (other than being a legal adult in your jurisdiction) the way that reverse mortgages do.


Should you use your home equity in retirement?


Using your home equity in retirement can help your personal finances if you’re looking to access more cash without having to sell your home. 


However, the benefits of taking a loan against your home need to be weighed against the risks, such as foreclosure if you can’t meet repayment terms. Even if that’s not an issue, you should also realize that you might not be able to leave your home as an inheritance for your children if the money to repay the loan needs to come from selling your home after you pass.


But if you’re comfortable with these risks, then using your home equity in retirement can be a great way to take advantage of the real estate boom while aging in place.


With Fraction, you can unlock up to $1.5M of your home’s equity. With optional monthly payments and fair interest rates, you can gain the flexibility to use your equity to fit your retirement needs, without having to move.


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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date. Please consult with a qualified professional to discuss your specific situation and confirm any information.  

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Interested in seeing what a Fraction Mortgage looks like for your home?

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