If you own a home, it was likely one of the smartest lifelong financial moves you have ever made. Congratulations!
Owning your primary residence gives you a place to live your life. It is also a forced savings account and a hard asset that can appreciate over time.
However, did you know that it is also a powerful financial tool that you have used throughout your life and can continue to use in retirement?
Your Home Has Already Given You a Lot of Financial Advantages
Perhaps you bought your first home when you had a young family and you wanted to provide a home for them in a good community with great schools. It was not only a place to live, but it gave you access to services.
Most people buy homes by securing a mortgage — this is a pretty sophisticated financial strategy, using debt to as a tool to get what you want or need in a responsible way. Many people have also used a Home Equity Line of Credit (HELOC) to get access to their home equity without selling their home.
Buying a home, using mortgages and accessing home equity are strategic financial decisions.
Should You Now Use Your Home Equity for Retirement?
The huge financial advantages your home can give continue into retirement. Particularly if you have built up significant equity.
That money can now be converted into retirement income, cash for retirement expenses, financial leverage to improve your overall wealth or a way to fund longevity, a long-term care need or other hard to predict event.
Explore the four ways you might want to use your home equity for retirement. And, try them out on your own financial plan by using the NewRetirement Planner.
1. Turn Your Home Equity into Retirement Income
There are a wide variety of ways to use your home equity for regular retirement income.
Use the Physical Space
It is becoming increasingly common for people to rent out all or part of their home as a source of income.
- Could you rent out a room in your home to a long-term tenant?
- Have you considered housesharing? Remember the Golden Girls?
- What about just renting your home when you go on vacation? VRBO and Airbnb are really easy ways to turn your home into income.
Consider Monthly Income from a Reverse Mortgage
A reverse mortgage is a specific type of home equity loan that is not paid back until you permanently leave your home. One of the options on a reverse mortgage is receiving your loan amount as lifetime payments. Your home equity is turned into lifetime income.
Downsize and Buy Income: Downsizing is usually the most efficient way to cash out your equity. If you want to turn that money into retirement income, a lifetime annuity is one option but you can also consider other income producing assets such as rental property, bond ladders, dividend producing investments and more.
2. Convert the Equity into Cash
Not everyone has saved quite enough for a secure retirement. However, your home equity is a real asset. You can convert the equity into money for retirement expenses.
Downsize and Use Your Equity:
When you downsize and release your home equity you gain a liquid asset that you can invest or spend as desired and appropriate. You have many options for downsizing.
- Sell and move to a less expensive home or to a retirement community
- Sell and rent a place to live
- Try the tiny house trend
- Retire abroad
Get a Home Equity Loan:
A home equity loan is a common way to access the money you have built up in your home. However, it can sometimes be difficult to qualify for this loan in retirement due to income requirements and your need to make monthly payments against the loan.
Get Cash from a Reverse Mortgage:
If you can’t qualify for a home equity loan, but want to stay in your house and need access to cash, a reverse mortgage might be an option. There are no income requirements for a reverse mortgage, you must be at least 62, and have sufficient equity. Best of all, there are absolutely no payments on a reverse mortgage loan until you die or permanently leave your home (other than keeping up with property taxes and insurance).
3. Use Home Equity to Gain Financial Leverage and Flexibility
Maybe you don’t exactly need cash now. It can still be beneficial for you to consider your home equity as a useable asset.
Having access to a home equity line of credit, cash proceeds from the sale of your home or a reverse mortgage line of credit gives you a greater array of financial options and more flexibility. Think of your home equity as another source of money to use strategically.
- Maybe you can’t afford to retire early without starting Social Security, but you know you are better off in the long run by delaying the start of the benefit. You could retire at your desired age and tap your home equity to bridge the time period between stopping work and starting Social Security.
- Perhaps you want to continue growing your investments instead of tapping them now but you need a source of funds. Home equity can be considered as an alternative source of funds.
Here are a few ways to gain leverage and flexibility with your home equity:
Home Equity Line of Credit:
A home equity line of credit can be an efficient way to have access to your equity. You only pay interest on the money you use, not all of the funds that are available to you.
Reverse Mortgage Line of Credit:
If you can’t qualify for a home equity line of credit, you might consider a reverse mortgage line of credit. There are actually many advantages to this loan over more traditional options. Compare the two options.
Sell the Home and Retain the Cash:
Of course, if you are ready to leave your home, downsizing and releasing the equity to cash is the most flexible option of all.
4. Keep Your Home Equity to Use as a Back Up Plan / Fund Unexpected Events
Perhaps one of the best ways to use your home equity is to hold on to it and only use it if you need to. Use your home equity if you live longer than expected and need additional assets. Or, tap into your equity to fund a long-term care need.
Home Equity to Fund Longevity:
One of the most challenging aspects of retirement planning is predicting how long you will live. And, it can be stressful to think about outliving your assets. Your home equity could be a backup plan for funding retirement if you (luckily) live longer than your assets.
Home Equity to Fund a Long-Term Care Need:
Long-term care is tremendously expensive. And, you have no way of knowing if you will need it or not. So, reserving your home equity to fund this expense can be a smart strategy.
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