Using Home Equity to Fund Retirement

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There are many benefits to using home equity for retirement income. You can tap into equity to pay for healthcare expenses, supplement income, move to assisted living, etc. Many people feel that since they’ve earned that equity, why not use it?

These are great benefits, but what are the advantages and disadvantages? When using your home equity, it’s essential to do research. The right move could give you extra income, but taking a wrong turn could cause you to lose your home.

Home-Equity Loans Can Give Lump Sum

Home-equity loans provide you with a lump sum based on your equity. Repayment is made over five to 30 years. This is great for those with a large expense that must be financed. This is an option for those with the cash flow to make the payments.

There are pros to home equity loans, including:

• lower interest rates
• flexible loan terms
• fixed interest rate
• possible tax deductions depending on use (check with an accountant)

The cons of a home equity loan include:

• monthly payments
• fees
• upside down or underwater mortgage if home values drop
• foreclosure risk

Take a hard look at what you need the money for and your cashflow to determine if this loan is for you.

Home-Equity Lines of Credit Spread Out Funding

A home-equity line of credit (HELOC) is different from a home-equity loan. With a HELOC, you are given a line of credit that provides revenue you can use as needed.

For a period, you withdraw money as needed and make interest payments over five to 10 years. Then, it transitions into a repayment period, during which your funding stops, and you must pay back the debt over 10–20 years.

There are some pros, which include:

• flexible access to funds
• lower interest rates
• flexible uses
• potential tax benefits (check with an account)

Cons of a HELOC include:

• sometimes, variable interest rates
• potential to overborrow
• potential for losing home
• closing costs and fees

Many people like HELOC because of its flexibility. But it all comes down to need and discipline so you don’t borrow too much.

Reverse Mortgage Has No Monthly Payments Due

Reverse mortgages are for those people aged 62 and over. If you have a lot of equity in the home, you’ll probably qualify for one.

Reverse mortgages are when a lender pays you a designated amount from your accrued equity. This amount can come as a lump sum, monthly payment, or line of credit.

Fees and interest will accrue monthly and are not due until you pass. At that point, the balance will be due. Your estate is charged with raising the funds to pay off the loan, which usually means selling the house.

It will remain in your name while you are alive and living in the house. The reverse mortgage can only be used on a primary residence. You also have three days to cancel if you change your mind. At that point, you'll receive your closing costs back from the lender.

If your home value drops below while living in the house, in most cases, there will not be a penalty. And if the balance is larger than what the home sells for, upon your death, the mortgage insurance company will pay the difference between what is owed and the home’s value.

Reverse mortgages don’t have a minimum credit score requirements.

These are the pros of a reverse mortgage:

• helps secure retirement
• remain in home
• can pay off an existing loan with proceeds
• no tax liability
• protected if the balance exceeds the home’s value

The cons of a reverse mortgage include:

• if you don’t live in the house or pay property taxes, you could lose your house
• heirs could inherit less
• it’s not free
• could impact other retirement benefits like Medicaid or Social Security
• complicated with many rules

A reverse mortgage could be helpful, but it isn’t for everyone.

Home-Equity Investments Base on Future Value

Home-equity investments (HEI) are for those who don’t want the increasing loan balance that occurs with a reverse mortgage.

Home-equity investments offer lump-sum funding with 30-year term lengths. They charge interest. Instead, HEIs charge a percentage of your home’s future increase in value.

This works in your favor if the value of your home decreases. The opposite is true if the value increases.

The pros of an HEI include:

• no monthly payments
• potentially receive large cash sum
• no restrictions on funds use
• long repayment term
• second properties eligible

The cons of an HEI are:

• sharing home’s future appreciation
• takes longer to apply
• not available for every property type or location
• uncertain costs

An HEI is a bet between you and the lender. You bet the value will decrease, and you won’t have to pay too much back, while the lender bets the opposite.

Cash Out Refinancing

Cashing out is when you refinance your home and take a large payment from your equity simultaneously. You can usually keep your mortgage payment the same and receive the cash if the interest rate is low enough.

Unfortunately, this may not be a good option for most homeowners in the current economy and with the latest interest rates.

Tapping Into Home Equity for Retirement

There are several ways to tap into your home’s equity if you need additional retirement funds.

But not every product or loan is the right choice. Be sure to research your options and read the terms and conditions of each product.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.