As today’s seniors begin planning out their retirement, they may be shocked to find out that the cost of retirement is much higher then they originally anticipated. This makes sense given the fact that the cost of living is steadily increasing and seniors are living way longer than the generations before them. Due to these factors, many seniors do not believe they have saved up enough money to successfully retire. In turn, some seniors are making huge sacrifices to secure their finances – even going as far as giving up on their dream retirement all together. If you are in a similar situation and believe this is the only solution, we are here to tell you that there may be other options available to you. One option that you may want to consider is using your home equity.
Home equity, by definition, is “the amount your home is worth minus any mortgage loan balances you owe to your lender”. For example, if you bought a house valued at $350,000 and you have a $200,000 mortgage, your home equity is $150,000.
If you want to take advantage of your home equity to help bolster your retirement, it’s important to know how to get access to it.
How Can I Access My Home Equity?
Accessing your home equity can be a tough task if you don’t know where to start. To help make the process a little easier, here are the common ways retirees can access their home equity:
- Refinance – To refinance is to reapply for a loan. Most people do this when they need help paying off an outstanding loan. By doing this, you could potentially lower your mortgage payments each month and in turn lower the interest rate. If this is the option you want to consider, just remember that you still have a mortgage payment you must take care of.
- Downsizing – If there are rooms in your house that you don’t ever use or space that seems unnecessary, it may benefit you to downsize to a smaller home. This process might provide you some financial flexibility for the remaining equity on your home. It would be in your best interest though to watch the housing market for fluctuations and try not to purchase a new home where there is a higher property tax.
- Reverse Mortgage – A common option for seniors 62 years or older is to apply for a reverse mortgage. This loan allows you to convert a portion of your home equity into money that can be used however you like. A unique attribute about the reverse mortgage is that you are not required to make monthly payments. However, keep in mind that homeowners must pay property taxes, homeowners insurance, and maintenance expenses to avoid foreclosure.
- Home Equity Loans and Home Equity Lines of Credit – These loans offer another way to access your home equity. Both allow you to borrow against the available equity in your home. Each one is useful for certain scenarios, but they also come with significant downsides. While these “second mortgages” can sometimes be beneficial, you may end up owing more than your home is worth if your property value declines. Keep in mind that these types of loans use your house as collateral. If you cannot afford to make payments on the loan, you will risk foreclosure of your home.
How Can I Use My Home Equity?
Once you have access to your home equity, there are many ways you can use it to help make your retirement a fruitful one. The most common use of home equity is to help fund retirement, which can include paying for health expenses, paying off a mortgage, making house repairs, and even paying to travel. This is not by any means the only way you can use your home equity, this is just the most frequent one.
Many seniors feel apprehensive when it comes to preparing for their future. With the cost of living rising along with life expectancy, many people fear they are not going to have enough money to provide for themselves. By knowing more about the flexibility of your home as an asset, you may feel more at ease when making plans for your retirement.