Planning for retirement requires years of savings, but what if the time comes and your nest egg isn’t enough? In fact, Bankrate’s new Retirement Savings Survey shows that 47% of working adults feel their retirement savings are far behind where they should be. With these increased financial pressures, your home may be your secret weapon, offering you a way to cover medical bills, emergency repairs, and other expenses without running out of cash.
Especially since your home has never been such a valuable asset. As home prices soared, homeowners gained record amounts of home equity. Baby boomers in particular, currently in or nearing retirement, are the generation with the most home ownership, holding nearly $20 trillion in real estate assets.
“Home equity is wealth. It’s savings. For most Americans, it’s the most important version,” says Masaharu Ueki, head of marketing and analytics at home equity investment firm Point. “This will allow every American, especially seniors, to cover the costs of living so they can enjoy life. This could be a very important tool for doing so.”
But before you start looking at your old farm as a piggy bank, it’s important to weigh the potential benefits and pitfalls. Let’s take a look at whether retirees should use their residence to pay their bills and the best way for retirees to do so if they choose to do so.
$100,000
The amount of available home equity that 3 out of 5 mortgage holders must borrow.
Source: ICE Mortgage Technology
Homeownership and retirement statistics
What is home equity and who can use it?
The percentage of your home that you own freely and clearly is called home equity (“equity” is a financial term meaning “ownership”). When you buy a home with a mortgage, the only part you actually own outright is the amount you contribute in cash, equal to your down payment, rather than the loan amount. The lender technically owns the majority of your home until you pay off your mortgage. However, each time you make a mortgage payment, your ownership stake gets a little bigger (and the lender’s share gets smaller).
Assuming you make your payments on time and the value of your home doesn’t decline, you’ll accumulate equity over the years. Rising real estate values and home prices can also increase home ownership. The increase in home value accrues on your side of the ledger because the original loan amount remains the same.
Of course, when you sell your home, your home equity is converted into cash. But there are ways to use it as instant cash while you’re still at home. Retirees are often in an ideal position to do so because they typically have paid off all or most of their mortgage.
Who can take advantage of housing equity?
The more equity you have and the lower your mortgage balance, the bigger the loan you can take out.
Lenders generally require that you own at least 15 to 20 percent of your home in order to borrow against it. The size of the asking price relative to the home’s value, or loan-to-value (LTV) ratio, is also important. It takes time to build up significant ownership, but retirement-age homeowners who are nearing the final year of their mortgage term or have paid off their mortgage in full can benefit from younger homeowners who are just starting out with a mortgage. Unlike owners, this requirement can be easily met. Mortgage term.
For the best odds of approval, you also need a history of on-time payments, a good credit score (preferably 700 or higher), sufficient income, stable employment, and a debt-to-income (DTI) ratio of less than 43. percent.
How much home equity you can borrow depends on the value of your property. Most financial institutions allow you to withdraw up to 80 percent. Bankrate’s Home Equity Calculator provides a way to see the size of your potential tappable stakes.
How to leverage your home equity
Leveraging home equity technically means borrowing against the value of your property. There are several ways to borrow against your equity.
Home Equity Loan/Line of Credit
Home equity loans or home equity lines of credit (HELOCs) are two of the most common options.
Although home equity loans and HELOCs are similar, there are some important differences. With a home equity loan, you receive funds in a lump sum and repay them at a fixed interest rate. Contract terms typically range from 5 to 30 years.
A HELOC, on the other hand, is a revolving line of credit. During the initial withdrawal period, you can withdraw money as needed (just like you would with a credit card). At the end of the draw period (usually after 10 years), you repay the borrowed funds at a variable interest rate.
cash out refinance
If you still have a mortgage, you can also access your home equity with a cash-out refinance. This replaces your existing loan with a new, larger mortgage. Your mortgage includes the remaining balance of your first loan plus a portion of your home equity in cash. .
reverse mortgage
If you’re 62 or older, you might consider using a reverse mortgage to leverage your home equity. Under this arrangement, the lender makes monthly payments to you in the form of tax-free income (this is why it’s “reverse”). Reverse mortgages must be repaid when you die, sell your home, or move permanently. Reverse mortgages have fees and interest, which increases the debt over time.
Stock transfer agreement
There are also home equity investment companies that allow you to borrow cash and pay it back when you sell your home. This is an arrangement called a co-ownership agreement. Technically speaking, the company will be buying equity in your home rather than issuing you a loan. Usually, instead of interest, a portion of the property’s value increases.
“Our credit score requirements and income requirements are much more flexible than HELOCs or home equity loans, so you get some of the same benefits of leveraging your home equity in a much more accessible way.” says. Mr. Ueki is the key to providing such contracts.
In all of these cases, the home equity serves as collateral for the money you receive, just as the home itself served as collateral for the original mortgage.
Reasons to use home equity after retirement
Your home is a convenient and low-cost way to borrow large sums of money at favorable interest rates. There are many reasons why you might decide to leverage your assets in retirement. Here are some of the most common ones.
- Emergency expenses. If you don’t have an emergency fund and an unexpected expense arises, it may be worth considering tapping into your home equity. However, it may take some time to receive your funds, so if you need money urgently, this may not be the best option.
- home improvement. You can use your home equity to pay for renovations, repairs, and renovations, whether for functional or aesthetic purposes. These upgrades can not only make your home more comfortable and prevent aging, but also increase property value. If the funds are used in this way, the interest on the loan is also tax deductible.
- Bill payment. Consolidating high-interest debts is another way to utilize your home equity. For example, if you have a large credit card balance, you can save on interest because home equity loans and HELOCs typically have much lower interest rates than credit cards.
- University costs. Will you send your children or grandchildren to college? You can use your home equity to cover tuition, room and board, and other expenses.
In Bankrate’s recent Home Equity Insights survey, more than half (58%) of baby boomer homeowners cited home improvements or repairs as a good reason to tap into home equity. However, only 12% of people thought it was a good reason to use it to manage regular household bills and expenses.
Disadvantages of using home equity after retirement
While there are good reasons to borrow against the equity in your home, there are also some potential drawbacks.
twenty three%
Percentage of baby boomer homeowners who say they have no good reason to use their home equity.
Source: Bankrate Home Equity Insights Survey
foreclosure risk
If you’re struggling with cash flow, tapping into the equity in your home can feel like a lifesaver. But remember, with a home equity loan, you’re borrowing against the value of your home.
“People need to be cautious about using their home equity as a way to pay certain bills,” said Lori Trawinski, director of finance and employment at AARP’s Public Policy Institute. “Suppose you have a large amount of credit card debt. Credit card debt is unsecured debt, whereas home equity is secured debt. You could be foreclosed on and lose your home.”
unstable income
Unless you are willing and able to return to work, repaying your loan will be even more difficult for retirees with limited income, resources, and earning power. Social Security accounts for nearly one-third of the income of people 65 and older. The average monthly retirement benefit in August 2024 was $1,872.
Trawinski advises borrowers considering a home equity loan to find out how much income is coming in, create a budget and plan for the worst-case scenario.
“That means you could face a major illness and need more money for medical expenses,” she says. “Or maybe your household income decreases due to the death of a spouse. If that happens, will you be able to make the mortgage or mortgage payments? Because no one wants to think about the unpleasantness. , you may not be able to plan well in advance.”
additional debt
It is especially important to consider why and how you leverage your home equity. If you’re consolidating high-interest debt, you’ll need to come up with a plan to reduce your spending. If you don’t, you could find yourself in even deeper financial trouble with the added burden of a new loan payment and new credit card bills.
Similarly, if you don’t have a specific purpose in mind for your money, you might end up spending it on everyday expenses, which can become a slippery slope. “Using a HELOC can be counterproductive because the more you use it, the more your payments go up, forcing you to actively spend more each month when you need the income,” says Mason, Churchill Mortgage branch manager in Dallas. Whitehead says.
pay more interest
Home loans tend to have lower interest rates than personal loans, but retirees may not have access to the best rates.
Lenders cannot discriminate against borrowers based on age. However, research shows that older homeowners have higher mortgage payments and are more likely to be denied a loan than younger applicants. This is probably due to age. Home equity loans are more risky for lenders because older borrowers may die before paying off their loans, even though they have higher credit scores and more home equity on average. It can seem like an expensive proposition.
Inheritance reduction
Even if you can afford the repayments, consider that borrowing against your home’s equity dilutes the value of a very valuable asset and turns something you own into something you owe. In fact, in a recent Fannie Mae survey of homeowners age 60 and older, more than half said they were unlikely to use their home equity for additional retirement income, and the top reason was that they wanted to freely and clearly own a home.
In fact, having home equity debt can complicate things when selling your home because, like a mortgage, it usually needs to be settled as soon as the ownership of the property changes. There is. Paying them back reduces your income. Home equity debt also creates complications for survivors when leaving assets to them (see below).
What happens to the home equity debt if the homeowner dies?
Just like a mortgage, a mortgage doesn’t just disappear when you die. A lien on real property that exists regardless of who owns the property. Lenders may require that the debt be paid immediately after your death (second to the original mortgage). In that case, you may have to sell your home to compensate. Or, if not, you can foreclose on the home.
However, this usually does not happen. Home equity loans are a type of second mortgage and are therefore eligible for Garn St. Mortgage. German Law states that lenders must work with your heirs or co-borrowers to take over loan payments and allow you to keep your home.
If you purchase credit life insurance or mortgage protection insurance when you take out a home equity loan, the insurance will cover the outstanding balance of your loan and will be paid directly to your lender.
Most reverse mortgages have special provisions. This allows the surviving spouse who co-borrowed to continue receiving payments and living in the home without being obligated to repay the debt until their death. Depending on when your reverse mortgage begins and whether you meet certain eligibility criteria, a non-co-borrower spouse may be able to continue living in your home.
After the last borrower or nonborrowing spouse dies, heirs have several options, including paying off or refinancing the loan, selling the home for at least 95 percent of its appraised value, and obtaining a deed in lieu of foreclosure. There is. “With a reverse mortgage, if you have equity left in your home at the time of your death, you can sell or refinance your home and your heirs can get that equity. If you qualify, you can refinance into a conventional mortgage. “You can,” Whitehead added.
Yes, it’s complicated. Therefore, proper estate planning is very important when retirees start taking on a mortgage. “Every borrower, no matter how many or how many assets are in their name, should have a will, trust or some kind of estate plan in place,” says Whitehead. “Without this, state probate would take longer and be more expensive. After death, the estate inherits the home, and any assets remaining in the home belong to the estate and the heirs.”
