Living on a fixed income has its limitations. Don’t get us wrong – retirement is absolutely worth the wait, and a proper retirement plan will ensure that your day-to-day expenses are covered. But you may still find after retirement that you want or need additional funds due to lifestyle changes, home renovation plans, health complications, family issues, a desire to change residences or a range of other factors.
Fortunately, there’s always the option of borrowing against the equity you have in your home. Since the nation has recovered from the recession to a large extent, many Americans have accumulated a significant amount of home equity. Data analytics provider CoreLogic reported that nationally home equity rose 12.3% year over year in the second quarter of 2018. This translates to an equity increase of $16,153 for the average homeowner. In Texas, the average equity gain was $10,610.
So what are some ways retirees can leverage the equity value of their homes? Consider how one of these three methods may be appropriate for your needs.
Reverse Mortgage Loans
Under the most popular type — the home equity conversion mortgage, or HECM — you may secure money based on your home equity but defer related mortgage payments (including interest) until you die, sell the home, or move out. You may receive the funds in a lump sum, installments and/or in the form of a line of credit. You must pay for property taxes and homeowners insurance, but you can keep living in the home without making mortgage payments. In this case, the principal and interest on the HECM are simply added to the balance. The lender recoups its costs when the home is sold at a future date. In some situations, the balance of the loan exceeds the home’s value before that happens, but usually, neither you nor your estate is responsible for paying off that difference.
To qualify for a HECM, you must be at least 62, live in the home that will serve as collateral, and own it outright or carry a minimum balance that will be paid at closing. Before entering such an agreement, you will often be required to attend mandatory counseling to ensure the terms are clearly understood. The out-of-pocket administrative cost of securing a reverse mortgage loan may run between $800 and $900.
Home Equity Lines of Credit (HELOCs)
These are available for homeowners of all ages. The intervals, terms, and available amounts will depend on factors such as the lender, your home’s value, your income, your credit rating, and your existing debt. Interest may be fixed or variable. HELOCs can be relatively easy to secure and are often attractive due to their tax-deductible interest under federal - and some state - income tax laws. A possible downside is that lenders may cancel them at any time, posing a potential risk to recipients.
While many consumers have apparently been reluctant to secure HELOCs since the recession, their popularity is back on the upswing. According to one CNBC story, analysts predict some 10 million U.S. homeowners will take out home equity lines of credit in the next four years — double the number who did so between 2012 and 2016. Lenders are also expected to start offering more attractive terms and interest rates.
Cash Acquisitions From Refinancing
This option allows you to replace your original mortgage with a bigger refinanced mortgage — ideally at a lower interest rate — that includes an additional lump sum of money for you to use for other expenses. The terms depend on your home value, your proven ability to pay off the new debt, and the lender’s guidelines for refinancing. That being said, you are generally responsible for the new closing costs, and you do lose equity in your home after this process. You will be expected to pay off the refinanced loan when you sell the house. To qualify, you must meet specific credit and income requirements that are more stringent than those for a reverse mortgage loan.
In today’s relatively healthy economic environment, U.S. consumers can expect several options for securing extra money based on the equity in their homes — particularly if they’re of retirement age. Talk to our experts about the pros and cons of each home equity option before deciding which one works best for your needs.