Retirement is a time of life that many people look forward to, but with it comes a host of unique financial challenges. From budgeting effectively and managing taxes to securing dependable streams of income and understanding the true value of your home, there are often more questions than answers.
A general rule of thumb is to have at least 10 times your current salary saved by the age of 67. However, if you’re going into retirement below that target, don’t feel bad.
In this blog post, we’ll explain how retirees can best access the full potential value in their homes during retirement, from creative financing tools to tapping into existing equity, and help you make educated decisions about potentially unlocking thousands in hidden assets.
Get a Reverse Mortgage
A reverse mortgage is a loan that allows retirees to tap into their home equity and secure funds. It serves as collateral, meaning there is no need to sell or move out of the property. This type of mortgage provides upfront cash, fixed monthly payments, or a credit line that can be drawn upon as needed.
Reverse mortgages differ from conventional home equity loans in that repayment is optional. Instead, any outstanding equity will be paid back when either the homeowner passes away, relocates, becomes indebted on property taxes or insurance payments, or fails to maintain their home properly.
Reverse mortgages are available to homeowners aged at least 62 who possess significant home equity. There are various forms of reverse mortgage loans, and the most common one is insured by the Federal Housing Administration, called home equity conversion mortgage (HECM). As of 2023, these mortgages are capped at $1,089,300, providing significant financial support during retirement.
To ensure a successful application, candidates should consider important factors such as application fees, and they must receive counseling from a HUD-approval reverse mortgage counselor. It is also important for applicants to responsibly maintain their homes when using them as their primary residence, otherwise, they risk losing them. If the heirs wish to keep the property, they will either need to pay off or refinance the reverse mortgage.
Get a Cash-Out Refinance
Cash-out refinancing is a type of mortgage refinancing that allows existing loans to be exchanged for larger ones at more desirable interest rates. Just as with home equity mortgage loans, factors like your credit score, income level, and debt load will ultimately determine your new rate. Any excess funds from this new loan could provide retirement income.
To qualify for a cash-out refinance loan, significant home equity is usually required, with lenders often permitting up to 80% of your property value as a borrowing limit.
Cash-out refinancing provides quick access to retirement income, but there are certain drawbacks to keep in mind. These include potential closing costs, loan-to-value (LTV) ratio limits, and losing access to lower interest rates. Closing costs, which can vary significantly depending on local regulations and lender fees, can include appraisal fees, title insurance premiums, transfer taxes, and other charges.
When it comes to retirement planning, many individuals find themselves considering downsizing their home as a potential option to access home value. Downsizing means selling your current home and moving into something less costly, in order to reap a lump sum that can supplement retirement savings and provide financial security later in life.
Downsizing offers several distinct advantages. It can unlock significant equity stored up in your home that could otherwise go towards debt repayment or investment opportunities. Furthermore, downsizing can substantially lower expenses such as mortgage payments, property taxes, and maintenance costs, ultimately creating savings you can put toward other financial goals.
Home Equity Line of Credit
As individuals near retirement age, they become aware of their assets and begin planning for their future financial needs. A key consideration for most retirees is accessing their home’s value, which often accounts for a considerable proportion of their net worth.
HELOCs, or home equity lines of credit, provide homeowners with the ability to tap into the equity in their homes. With a predetermined credit limit, borrowers can draw funds as needed. They then repay the borrowed amount, along with interest and fees, similar to a traditional loan. The main advantage of a HELOC is its flexibility, so instead of accessing all their home value at once, borrowers have the option to use the funds only when necessary, incurring interest only on the amount borrowed.
This approach may prove particularly valuable to retirees who face ongoing expenses such as healthcare or renovation projects but prefer not to take out large loans that may exceed their immediate needs.
It’s important to understand the basic options offered to retirees who want to access the value of their homes. A reverse mortgage is a good option for those who want to access the potential equity in their home.
Downsizing to a less expensive home can be an effective way to free up some assets for retirement, and the home equity line of credit allows you to access your equity with fixed rates and regular payments over time. With careful consideration of your priorities and budgeting projections, one of these strategies could help make your retirement dreams come true. Retirement is an exciting time for many, so exploring all your financing options is key.