If you’re like many soon-to-be retirees, you don’t have enough money saved to last your whole retirement. In fact, some surveys show that almost half of retirees don’t have enough saved to cover basic living expenses in retirement.
So, what if you’re entering your retirement years without much money in the bank, but with a nearly paid-off house? Tapping into that home’s equity to meet retirement expenses can be tempting.
In truth, there are several ways to tap into your home’s equity during (or just before) your retirement. You could take a big gamble by investing in a low-interest home equity loan, hoping for bigger returns. Or you could try a reverse mortgage to provide income after retiring.
But here’s the thing: tapping into your home’s equity during retirement is a risky move. One that could cost you in the long run.
Perils and Pitfalls of Borrowing During Retirement
The temptation, when it comes to home equity, is to borrow just a little bit more when housing values are up.
But we know what happens next. A crisis like the one from a few years ago hits. And suddenly, you’re underwater on a home that was once close to paid off.
Learn More: Can You Really Pay Off Your Mortgage Early with a HELOC?
Being underwater on your home isn’t the end of the world, if you’re planning to stay in it for a while and can make payments. Your property value may come back around when the market heats up again.
But what if you were planning to move later on during retirement? What if you can no longer physically maintain your property, or need to move somewhere that is handicap-accessible? In this case, being underwater on your home could prove disastrous.
Of course, you should always keep in mind that borrowing against the place in which you live carries significant risk. If for some reason you become unable to make the payments, you’ll suddenly find yourself without a roof over your head.
This is why it’s not recommended that you borrow from your home’s equity just before or during retirement. Now isn’t the time to see your home as a source of income, but as a stable place to live.
What About Reverse Mortgages?
Should you consider a reverse mortgage, which allows you to access a portion of your home’s equity if you’re over the age of 62?
In this case, you don’t have to repay the loan as long as you live in the house. When you choose to move or pass away, the proceeds of the sale pay the loan, fees, and interest.
It sounds tempting, especially if you aren’t terribly concerned about leaving your home behind as an inheritance. But there are some caveats.
For one thing, the home can still be foreclosed upon if you can’t pay the property taxes and homeowners insurance. Another thing is that these loans are fairly high-cost, and could prove especially difficult to deal with if you decide to move out of the home before you pass away.
Resource: How to Get Out of Debt… and Fast
Other Ways to Tap Into Your Homes Equity
In an emergency, a reverse mortgage can help you make the most of your home’s equity. While a reverse mortgage is likely the most-marketed way to make use of your home’s equity in retirement, it’s not necessarily the best.
You can tap into your home and its equity in other ways, too, including:
- Home-sharing – Models like Airbnb could allow you to pay for your mortgage. Or if your mortgage is paid off, home-sharing could give you the extra money you need to live comfortably. Plus, being a home-sharing host can be a fun way to make new connections from around the world!
- Renting your home – Dreaming of a retirement where you travel? Consider renting out your whole home. You can use the rental money, fewer expenses, to fund your adventures. Then when you’re ready to settle back down, you’ll have a house to which you can come home.
- Downsizing – The most common way to tap into a home’s equity during retirement is to downsize. If you owe $20,000 on a home worth $150,000, you can easily sell the home and pay off the mortgage. Then you’ve got $130,000 to work with. You could probably buy a smaller home in the same area, or even move to a more affordable location. Buying a cheaper home with those funds gives you a stable place to live and extra money to live on.
It Could Be an Emergency Fund
Obviously, there are many options for making use of your home’s equity and space in retirement. Most are better than taking out a HELOC or home equity loan.
But what if you’re in a truly sticky situation? Could your home’s equity turn into an emergency fund?
Maybe. If you have, for instance, unexpected medical debt, you could use your home as a temporary emergency fund.
This is a legitimate option if your choices are between taking out a high-interest credit card or personal loan and borrowing against your home at a much lower rate. However, you’ll need to keep certain potential issues in mind. For one thing, a personal loan doesn’t put the roof over your head at risk.
Chances are, though, that any unexpected debt you incur during retirement can be negotiated without tapping into your home’s equity. Most hospitals, for instance, will let you make payments on your medical debt, often with zero interest.
Are you still asking yourself should I take out a home equity loan in retirement?
If you’re in this rock-and-a-hard-place type situation, borrowing some of your home’s equity could make sense. Just make sure that you don’t go underwater on your home. That way, if you need to sell it to get out of the loan later in retirement, you can do so.