Are you preparing for retirement? Maybe you think you have enough in savings to maintain your lifestyle. But you’re concerned about your ability to handle unexpected expenses, such as medical expenses. Or maybe you just don’t have enough in savings to retire comfortably.
The good news is that if you own your home, you may have some options for tapping into home equity to help fund your retirement years. This is not the best case scenario. It’s better if you can fund retirement from your savings and your Social Security income.
But having your home’s equity to fall back on can be helpful during times of need. And you may have several options available to you, even if you still owe something on your home. Here are five ways to leverage your home’s equity during retirement, depending on your situation.
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One of the simplest ways to cash in on your equity during retirement is to sell and downsize. Say you get $150,000 for your home. If you can turn around and purchase a $75,000 home, you can bank $75,000. Plus, with the smaller, less expensive home, your taxes and maintenance costs drop.
Downsizing can be an emotional decision, especially if you’ve lived in your current home for decades. But it’s probably the most efficient way to get a long-term benefit from the equity you’ve worked so hard to build. Plus, a smaller home can be physically easier to care for, potentially making it easier to age in place long-term.
What if you don’t have enough equity to sell your home and purchase a smaller home in cash? In this case, you can still get into a smaller mortgage and a smaller home. This can make your expenses more manageable in retirement.
Take Out a HELOC
When you want to stay in your home, you can still tap into your equity. For instance, if you get hit with a large medical bill, you can use a HELOC to pay it off. The key here is to make sure you get the best possible rate, and that you can comfortably make the HELOC payments on your retirement income.
Another option is to simply open a HELOC while rates are still low. It can stand as an emergency fund that you can use as needed. Since this is a revolving loan, it gives you flexibility but with a much lower interest rate than most credit cards.
Finally, if you plan to downsize in the future, a HELOC could help you get more for your home. Consider using a low-interest HELOC to make value-boosting upgrades. This can make your home more comfortable to live in now and easier to sell down the road when you’re ready.
Consider a Reverse Mortgage
Reverse mortgages had, at one time, a very bad reputation for retirees. But that’s starting to change. In 2013, the federal Department of Housing and Urban Development created the Home Equity Conversion Mortgage program.
Through the HECM program, homeowners who are at least 62 years old can cash out on their home equity. They don’t have to repay the equity until they either move, sell the home, or pass away. The mortgage is repaid out of the proceeds of the sale of the home. But if the loan balance exceeds the value of the property, the heirs don’t have to pay the difference.
Reverse mortgages are designed to allow older homeowners to age in place while still using their home equity. With this FHA-insured program, reverse mortgages have become a more tenable option for aging homeowners.
To qualify for the program, you must be at least 62 years old, have significant equity in your home, occupy the home as your principal residence, and not be delinquent on any federal debt. You also must be able to financially handle the property taxes, insurance, and HOA fees on your home. And you’ll have to meet with a HUD-approved counselor to ensure that the HECM program is right for your needs.
Look at a Sale-Leaseback
A sale-leaseback arrangement can help retirees and soon-to-be retirees in several ways. In this arrangement, retirees sell their home, but immediately lease it back from the new owner.
Some retirees use this option over the long term. For instance, if your children want to settle into their childhood home someday, they might purchase the property. Then you can immediately lease it back from them. This allows you to get rid of some of the obligations of a mortgage. But you’ll make the sale arrangement more affordable for your adult children by paying rent.
Another option is to use a sale-leaseback to sell your home a few years before retirement. This can be helpful in letting you know exactly how much you’ll get for your home before you retire. But you won’t have to relocate twice, and can take some time to decide where to live after retirement.
List a Room
Technically, this option doesn’t have you tapping into your home’s equity. But listing a room or home-sharing can help you stay in your current home and bring in additional income.
You’ve got a few options here. One is to find a long-term roommate or housemate. Another option might be to use that HELOC to turn a part of your home into a separate apartment. This could bring in enough income over the long term to pay back the HELOC and then some. Or you could try a flexible home-sharing arrangement through a company like Airbnb. This lets you list a room in your home part of the time, so you can make money without constantly dealing with a housemate.
Too many retirees undervalue the importance of home equity for retirement. But you worked for decades to pay off that home. And now you can use that equity to make for a more comfortable and stable retirement.