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These days, seniors and retirees face a double whammy: inflation is fast approaching 10%, and stock and bond markets have declined by 10% to 20%. Meanwhile, home equity might have appreciated significantly, making it tempting to tap it for financial support.
Taking advantage of your home equity might be a viable solution. Choosing the right method for you requires research. Several ways can help you finance your retirement using your home equity.
It may be possible to sell your home, realize a capital gain, and buy a home that’s less expensive to purchase and maintain. You might find one better suited to your retirement needs than that large three- or four-bedroom suburban house that needs more upkeep and a car to get around. There is one problem, however: any potential retirement house you consider may have appreciated nearly as much as your current one. Research whether you can reduce living expenses or reinvest capital gains for retirement income.
Reverse mortgages are useful for financing retirement in a variety of ways. It is possible to buy a new home with a reverse mortgage without a monthly mortgage payment, finance home improvements, provide a line of credit to cover living expenses or generate regular monthly income. The reverse mortgage loan doesn’t need to be repaid until you sell the house, although most reverse mortgages let you pay down the loan.
The terms and costs of a reverse mortgage are among the details you should investigate. Also, you should seriously consider any misconceptions about this option. Consider exploring recent innovations in reverse mortgages as part of your research. Finance of America Reverse (FAR) pioneered a reverse mortgage product that starts as a conventional mortgage and helps homeowners build equity, then automatically converts to a reverse mortgage after ten years. Pre-retirees several years from retirement could benefit from this type of mortgage.
Home equity line of credit (HELOC)
HELOCs are loans that can be accessed as needed during their “draw period,” typically ten years. Payments are not required during the draw period since your loan accumulates interest (although you may choose to pay it down if you prefer). You will have to start repaying principal and interest at the end of the draw period. You can use a HELOC to bridge the gap until you receive retirement income, such as Social Security or an annuity. You might also find HELOCs useful if you intend to sell your home before it expires.
Equity sharing agreement
A home equity sharing agreement pays you a cash payment in exchange for a specified ownership percentage in your home. This type of agreement does not require monthly payments or interest payments. The investment company receives a cash payment from you, plus a percentage of your home’s appreciation, at the end of the specified term, which can last from 10 to 30 years.
Cash-strapped homeowners with substantial home equity can benefit from these products. You’ll have to thoroughly research the terms and conditions, which can be complex and costly. In addition, you should plan for the possibility of having to sell your home at the end of the term.
Add an ADU
It might be possible to add an accessory dwelling unit (ADU) that you can rent for extra income. It is possible to build an ADU as a stand-alone building, as a converted garage, basement, or as an extension on your home. You might consider financing an ADU with a reverse mortgage or a home equity line of credit.
Consider renting one or two bedrooms in your three- or four-bedroom home to supplement your retirement income if you like it. Additionally, lonely retirees can benefit from additional companionship. A recent online real estate marketplace Trulia study found that older Americans own nearly 3.6 unoccupied rooms.
There are logistical details to consider if you share a living space with others. Using services like Silvernest can help you find and evaluate roommates and make the necessary arrangements.
Grandparents can share a home with their adult children or grandchildren as an alternative to house-sharing. The grandparents will be able to share living expenses in addition to helping the parents by being built-in babysitters, making them feel useful and fighting loneliness.
A creative couple rents out their three-bedroom home and uses the rent money to fund an extensive road trip. It is possible to rent a smaller, less expensive home as a variation on this idea. Retirees can preserve their homes while getting extra cash if it doesn’t work out.
Be sure to carefully explore these ideas and consider all the ramifications before committing to one.