One of the best things about owning your own home is that, simply by buying it, you are investing in your future. Unlike renting, every time you make a payment on your mortgage, you are building more equity and own more of your home.
This makes homeownership a potentially important element of retirement planning. With Social Security in some hot water and people living longer, the need to save up for your post-retirement life is paramount. If you have done the math and need extra income in your golden years to bridge the gap between your savings and your expenses, then your home can be a viable and valuable asset to maintain a high quality of life.
But how exactly do you access the equity in your home in retirement? A home offers possible value to retirees in several distinct ways:
Sell your home
Maybe the home you bought was perfect for a growing family, but now that the kids have found their own places, it may be too big. Heating, cooling and powering a larger home can be costly. Not to mention that multistory homes may pose difficulties for older residents with mobility issues. One of the simplest ways to generate extra income is to sell your home and downsize to something that matches your current lifestyle.
If your home is too large but you don’t want to move, consider renting out part of the home like a spare bedroom. In addition to offering a source of income and a way to share utilities, it can also provide a degree of companionship and support. Having friends and extended family move in is an ideal situation – when soliciting renters you don’t know, make sure to vet them carefully and ask for many references.
Borrowing against your equity
Since your home functions as an asset, it is possible to establish a home equity line of credit, or HELOC, with a reputable lender where you get monthly payments based on the value of your home. These are often used as home improvement loans or other short-term expenses. The best part about HELOC is that you never have to move out of your home – you can spend the rest of your life living there.
“Tapping this kind of credit a year or two before you retire can be a good plan as long as you can pay it back before it becomes burdensome,” Jamie Hopkins, co-director of the retirement income program at the American College of Financial Services, told Bankrate. “But if you have to spread the payments out over 15 or 20 years, then you are better off looking at a different financing plan that doesn’t include a risk that you’ll be strapped for a long time.”
A reverse mortgage
Similar to HELOC, a reverse mortgage (often referred to as a Home Equity Conversion Mortgage Line of Credit) is another way to access the equity of your home without needing to move out. The homeowner gets a monthly payment from a lender and in return, after the homeowner passes away or moves, the bank takes possession of the home.
“The line of credit grows over time. It doesn’t have any required monthly principal and interest payments, and it doesn’t have a predefined maturity date,” says Joseph Demarkey, strategic business development leader at a national reverse mortgage lender. While in previous years, reverse mortgages were sometimes considered predatory, increased regulation and oversight has made them much safer and friendlier to homeowners.
“Reverse mortgages used to have a bad reputation, but the government has shut lenders’ ability to sell reverse mortgages to people who can’t afford them,” said Hopkins. “Used strategically, it can be a very good tool.”