How to Use Your Home Equity in Retirement

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Real Estate

Ready to kick back, relax, and enjoy your retirement? Most of us save and plan for decades to enjoy the period of our life when we no longer need to go into the office and work an 8-hour day for a paycheck.

But even with those decades of hard work, it can be tough to save up enough cash to cover all your costs in retirement. Many soon-to-be-retirees face a shortage between what they saved for retirement and what they actually need to live on.

For homeowners, that may be a problem that’s relatively easy to solve. Tapping into the equity in your home can help you stretch your nest egg quite a bit further. Here’s what to think about before you do.

Should You Use Your Home’s Equity?
It’s not always necessary to use the equity in your home. If you are able to cover all your costs with no problem, then you probably don’t need to tap into your equity.

But there are times when it makes sense to consider using your home’s equity:

You’re having difficulty meeting your monthly expenses.
You want to diversify your portfolio for retirement.
You want to pay off an existing debt (that has a high-interest rate).
You want to make a home improvement that will increase your quality of life and/or the value of your home.

If you’re uncertain about whether it’s a good idea, you should talk to a certified financial planner who works as a fee-only advisor and who will sign a fiduciary oath on your behalf. They can help you plan and answer questions about whether using your equity makes sense for your situation.

If you do decide to use your equity in the home, here are a few ways to do so:

Use a Home Ownership Investment
A home ownership investment is a powerful way to unlock some of the equity in your home without taking out a loan.

The Unison HomeOwner program can unlock up to $500,000 of your home equity and the money can be used for anything you want – including paying monthly expenses, paying off debt, or making home improvements. Because it’s a home ownership investment, not a loan, there are no monthly payments and no interest charges.

How does it work? Unison invests alongside you as a partner. In return for the company’s investment in your home, they receive a portion of the future change in the value of your home. Unison shares both the upside and downside risk with you. When you choose to sell your home, up to 30 years later, if the home value rises, both you and Unison share in the appreciation. If the home value falls, both you and Unison share the loss.

Use a Home Equity Loan or Line of Credit
You can tap the equity in your home with a home equity loan or a home equity line of credit (known as a HELOC). A home equity loan works like most other loans: you agree to borrow a set amount of money, receive a lump sum, and pay that back with interest and in installments each month.

A HELOC works a little differently because it’s not a loan with pre-determined monthly payments. Instead, it’s a revolving line of credit, similar to a credit card. You usually have between 5 and 25 years to borrow against a certain amount of equity and repay (with interest) whatever you take out.

The time during which you can use the HELOC is called the draw period. The line of credit revolves during this period, so you can borrow and repay the balance multiple times. The total amount is due back in full with interest at the end of the draw period. Any time you have an amount outstanding, you will make monthly payments.

You can use a HELOC or home equity loan during retirement, but remember that you will need to pay the money back. You should have a plan in place for how to repay the funds – and the interest – before you agree to take a loan or a line of credit on your home. In a worst case scenario, a lender could foreclose on your home if you fail to pay them back.

Consider a Reverse Mortgage

A reverse mortgage can allow homeowners 62 years or older to turn equity, in their homes into cash in a way that provides them with the income they need through retirement. You can get your cash in a lump sum or in monthly payments, or in a line of credit.

But it’s important to remember that a reverse mortgage is still a loan which comes with origination fees and interest charges. It requires that you have no other debt on your property, so if you have an existing mortgage loan, you will have to repay that in full from the reverse mortgage proceeds. And you will need to pay the reverse mortgage loan back when you move out of the home, sell it, or pass away.

A reverse mortgage can give you income in retirement and whenever the home is sold, the money is used to pay off the loan. But reverse mortgages can cause a lot of trouble if you’re not careful. The monthly payments from a reverse mortgage might not be enough to cover monthly costs like healthcare. And the high fees that you incur when you sell the home can leave you in a worse financial position than if you skipped the reverse mortgage altogether. Over time a  reverse mortgage can potentially eat up all of the equity in your home.


Photo and Text Courtesy of Unison. 

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