With the cost of living increasing and life expectancy rising, many seniors are discovering they may not have enough saved for retirement. Some sacrifice the retirement they always dreamed of. Others sacrifice day-to-day luxuries to ensure their retirement stays financially sound.
For many older Americans who own a home, it doesn’t have to be this way.
What many seniors don’t know is the home they have invested thousands of dollars into throughout the years could finally pay them back – just in time for retirement. In some cases, the amount of equity available to them could be even more than what they have saved for retirement.
Refinancing is like reapplying for a home loan. When you refinance your home, you refinance on the outstanding amount owed on your loan. This can lower the monthly mortgage payment and, hopefully, the interest rate. Keep in mind, with this option, you still have a mortgage payment.
If you could actually benefit from a smaller house that better suits your needs, downsizing your home could give you financial flexibility from the remaining equity. Of course, this only works if the home you purchase costs less than what your current home sells for. If you choose this option, watch the housing market, which can fluctuate. Also, make sure you choose a location that does not have higher property values or taxes.
Home Equity Conversion Mortgage (HECM)
The Home Equity Conversion Mortgage uses the equity from your home to first pay off your existing mortgage (you will not have to make another monthly mortgage payment as long as you live in the home),* then use any remaining money however you wish. Homeowners age 62 and older can receive the money in a lump sum, monthly payments, or line of credit.
The line of credit is currently being touted by many financial advisors and finance news outlets as a great retirement tool. It allows seniors to put money into a line of credit that they can use to pay off current debts, save for future expenses, or use as livable income now to defer using other retirement assets, which in turn gives those assets time to increase in value.
Even for those who don’t need the money right away, the line of credit option is recommended – especially if you are 62 years of age. Any unused money in the line of credit increases in value over time; so the earlier you start the line, the more time it has to grow.
Downsize with a HECM
You can also use a HECM to purchase a new home without making another monthly mortgage payment as long as you live there.* Downsize and use the remaining equity to pay for the down payment, which is typically around 40%, depending on your age. After that, you may still have some remaining equity to use as you wish and you won’t have to pay a mortgage on the new home because the HECM pays that.
*Homeowner is still responsible for taxes, insurance and property maintenance.