Planning for retirement has always required some amount of financial know-how, but considering the pandemic-related financial strains many are now dealing with, it’s become more important than ever to be decisive and creative when it comes to managing your money.
For homeowners, almost nothing could be more important than your home. This is likely your biggest asset (and possibly one of your largest expenses). How can you leverage your home to help you reach your retirement goals, even in a tough economic climate? Here’s what you need to consider.
Tactic 1: Reverse mortgage
Just like a traditional mortgage, a reverse mortgage allows homeowners to use their home as security for a loan. What makes a reverse mortgage different, though, is that payments — often tax-free — come to you from your lender, based on your home equity. The loan is repaid by your estate after your death or when you move out of your home. There are specific qualifying rules you must adhere to. You must be at least 62 years old to obtain a reverse mortgage and have at least 50% equity in your home. There are four ways for homeowners to extract equity from their homes. The most recent statistics rank reverse mortgages as the least popular method, but despite this, 33,000 were originated in 2018.
Do use for:
- Extracting equity: Although there are other options for extracting equity, such as a cash-out refinance mortgage or a home equity line of credit, these methods don’t work for every circumstance. If those options don’t work for you right now, the ability to obtain a reverse mortgage could give you more financial flexibility.
- Staying in your home: If you’re considering a move from your home or community due to financial concerns, a reverse mortgage could make it possible to age in place.
Don’t use if:
- Others depend on you for living arrangements: A reverse mortgage becomes due immediately upon death, which means your heirs will be responsible for paying remaining funds when they settle your estate. Sometimes this involves selling the house, which could mean anyone else living in the home and not on the paperwork for the reverse mortgage might have to move.
- You’re considering long-term care: While a reverse mortgage could help you find the cash necessary to pay for medical bills as you age, it becomes due when you move out of your home — even if you move to long-term care. This could create a massive financial strain, especially if you’re trying to afford the cost of long-term care while also repaying your reverse mortgage.
Tactic 2: Home equity line of credit
A home equity line of credit (HELOC) is a revolving credit line based on the equity you’ve built up in your home. A HELOC works similar to a credit card, making cash available when you need it, although not in a lump-sum payment like a loan. In 2018, 1.12 million HELOCs originated. You typically need to have at least 15% of your home paid for to qualify. Keep in mind, due to the financial uncertainty of the COVID-19 pandemic, some banks, such as JPMorgan Chase, have announced application freezes on HELOCs, but many banks still offer them.
Do use for:
- Obtaining large amounts of cash: If you’ve built up considerable equity in your home, you could get a large HELOC, which could make it easier to pay for big expenses like home repairs or medical bills.
- Flexibility: You can use funds from a HELOC when you want and however you want. You can also use as much or as little of your HELOC as you want.
Don’t use if:
- You have a bad track record with revolving credit: Unlike a loan, a HELOC is revolving credit, meaning you can’t get out of debt by making the minimum payments. If you’ve had a bad history of credit card debt in the past, a HELOC as you’re approaching retirement might be a risky strategy.
- You want a fixed interest rate: Unlike a loan with a fixed rate, the interest on your HELOC could increase if interest rates rise.
Tactic 3: Cash-out refinancing
Cash-out refinancing refers to the financial strategy of taking out a new mortgage on your home for an amount that is larger than your original mortgage. You use the new mortgage to repay the old one, then keep the additional funds. Refinancing has boomed during the pandemic, with the total number of home refinancing loans up 130% in the second quarter of 2020, the highest number in 17 years.
Do use for:
- Obtaining a lower interest rate: Cash-out refinancing could be the cheapest way to extract equity from your home as rates are generally lower than those for a HELOC. You should compare both methods before choosing.
- Consolidating debt: If you have other forms of debt to repay, such as credit cards, using a cash-out refinance could help you simplify your payments and reduce the amount you’re paying in interest.
Don’t use if:
- You risk foreclosure: If a cash-out refinance doesn’t fit safely in your monthly budget, it might be wise to skip this strategy as you risk foreclosure should you default.
- Your fees aren’t worth the cost: Make sure to add up all the fees associated with a cash-out refinance, such as any closing costs. If you won’t save a significant amount after you’ve paid fees, it might not be worth the risk or hassle.
Leveraging the financial potential of your home can help you adjust for any dips in income or increases in expenses, especially when considering retirement. Learning how to use your home to work for you could be the difference that helps you stay financially afloat.
Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports
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