Using Home Equity for Retirement

Retirement is a time that many Americans eagerly look forward to. We work tirelessly, save diligently, and learn how to plan for retirement strategically knowing the eventual payoff will make all of this worth it. But even after decades of planning and preparation, variables outside of our control like rising costs of living and economic uncertainty can send us back to the drawing board. This time, however, instead of having years to draft a foolproof plan, we have just a few years (or months) to do so –– if we want to adhere to our dream retirement date, that is. 

So, how do you stick to your predetermined schedule while still ensuring a secure and comfortable retirement? If you’re like many homeowners, you turn to what may be an unlikely source of retirement income: your home equity. Although it might not be many homeowners’ first thought, using home equity for retirement is not a new thing by any means, with older homeowners historically using tools like reverse mortgages to provide some financial flexibility in retirement. But reverse mortgages are far from the only options for accessing your home equity, and you may find that other avenues provide a better (and safer) alternative. Below, we’ll examine the role home equity can play in retirement planning, as well as some of the best ways you can access your home equity while still protecting your financial future.  

The Role of Home Equity in Retirement Planning 

Home equity refers to the difference between the current market value of your home and the outstanding balance on your mortgage. When you sell your home, your home equity will be what you walk away with –– but you can also leverage this home equity without selling your home. We’ll look closer at the tools that allow you to access home equity later. For now, let’s focus on the role home equity can play in retirement planning. 

Understanding Home Equity's Importance for Retirement 

Your home equity can be a powerful financial resource during retirement, acting independently or in tandem with your traditional retirement savings to make your life easier and help you achieve your goals. If you are prepared for retirement, but just slightly undershot your post-retirement income needs, a portion of your home equity can create a little wiggle room. And if you’re retiring without substantial savings, your home equity can act as a replacement for these funds –– allowing you to retire when you want and enjoy your “golden years.” 

There are countless applications for your home equity. Whether your home equity helps you cover day-to-day retirement expenses or provides funding for a vacation decades in the making is entirely up to you. 

Benefits of Tapping into Home Equity for Retirement Funds 

Armed with a better understanding of home equity and its role in retirement, let's explore the specific benefits of using it to fund your future:

• Supplementing Retirement Income: As mentioned above, one of the clearest benefits of tapping into your home equity is the ability to supplement (or entirely replace) your retirement income. This additional income can help bridge the gap between your retirement expenses and your other sources of income, such as Social Security or pension payments, making your post-retirement life much easier. 

• Flexibility in Planning: Try as we might to prepare for every possible outcome, retirement is not without its fair share of surprises. And while some of these surprises are exciting and rewarding, the brunt of them are flat-out expensive. By accessing your home equity, you’re better prepared to address these unwanted expenses, avoiding the need for high-interest credit card loans and creating some added flexibility in your retirement planning. 

• Potential Tax Advantages: Certain tools used to access home equity, like the popular home equity loan, may carry tax benefits with them –– as long as the funds from the loan are applied toward the home used as collateral.¹ While this won’t benefit every homeowner, those who are planning to make the necessary renovations to comfortably age in place may find a reduced bill come tax season. 

• Peace of Mind: Perhaps the most significant benefit of your home equity is the peace of mind it provides. When confronted with an unexpected medical bill, a costly home improvement project, or just the weight of day-to-day expenses, your home equity can lighten the load –– so that retirement doesn’t feel like work. It’s hard to put a price tag on peace of mind, but the value of your home equity comes pretty close. 

Evaluating Your Retirement Needs and Goals 

Whether you choose to use home equity for retirement income –– and what tool you use to free up this equity –– will come down to your needs and goals. Therefore, it’s important to consider the following when determining where your home equity fits into your retirement plan. 

Estimating Retirement Expenses 

As a general rule, financial experts say you should be able to replace 70-90 percent of your pre-retirement income using your retirement savings.² So, before you decide to leverage your home equity, it's essential to have a clear understanding of your expected retirement income as well as your needs and expenses. While there’s no way to predict the unknown, you can get a general idea by estimating your post-retirement expenses –– considering factors like housing costs, healthcare expenses, travel, and daily expenditures. Start a budget by comparing your income to your expenses, then decide whether your home equity plays a role in your retirement planning. 

Setting Financial Objectives for Your Retirement Years 

Now that you’ve got a clear idea of your post-retirement income and expenses, you can begin to establish clear financial objectives for your retirement years. Carefully consider the lifestyle you plan to have in retirement, how you envision your retirement impacting your family's financial future, and even what legacy you hope to leave behind. While your best years have yet to come, and the thought of what comes next can feel morbid to some, having well-defined objectives for your future will guide your decision-making process when it comes to using home equity for retirement.

Utilizing Home Equity Options for Retirement 

There are several ways to access home equity, with home equity loans and home equity lines of credit (HELOCs) being some of the most prevalent. But while the two are similar, their differences –– and the impact each can have on your retirement –– are worth noting. 

Home Equity Loan

A home equity loan is a secured loan, backed by the property itself, that allows you to access a portion of your home equity in the form of a lump sum. You’ll receive all of your available funds upon loan approval, paying the loan back (with interest) via monthly payment for the next five to 15 years. 

Home equity loans provide an appealing alternative to personal loans and credit cards, offering lower, fixed interest rates. With that said, if you’re looking for a source of income to bolster or replace your retirement savings, a home equity loan can be a solid option. 

Home Equity Line of Credit (HELOC)

As the name would suggest, a HELOC functions less like a traditional loan and more like a revolving door of credit –– allowing homeowners to access home equity (up to a set limit) over a predefined term. HELOCs generally come with variable interest rates, but interest is only paid on the amount you choose to borrow. If you have plenty of retirement savings but are looking for some additional flexibility, a HELOC may be the better option. 

Reverse Mortgages for Supplementing Retirement Income 

Reverse mortgages provide yet another pathway to home equity, but while home equity loans and HELOCs are open to homeowners of any age, reverse mortgages are specifically designed for those 62 and older.³ This tool allows you to convert a portion of your home equity into tax-free cash without selling your home or making monthly payments.

Instead, the loan is repaid when you sell the home, move out, or pass away. Like home equity loans and HELOCs, reverse mortgages can provide a steady stream of income in retirement, as well as financial stability and flexibility. However, it’s important to consider the impact a reverse mortgage loan may have on your and your family’s long-term goals. 

Considerations and Potential Risks 

We’ve highlighted the many benefits of using home equity for retirement. Now, let’s examine some of the limitations of this strategy. 

Assessing Impact on Future Generations 

While using home equity for retirement can benefit you personally, be sure to consider the impact it can have on your heirs. The method you choose to access your home equity can have lingering effects –– reducing or eliminating a potential inheritance. 

This is especially true if you opt for a reverse mortgage, which may result in your heirs needing to repay the loan balance or sell the home when you pass away. When you’re making a decision that may impact future generations, it's crucial to involve your family in the decision-making process to ensure everyone’s intentions are aligned. 

Mitigating Risks Associated with Home Equity Use 

As with any financial decision, there are risks associated with using home equity for retirement. Some of these risks include: 

• Loan Terms and Interest Rates: Terms and rates can dramatically impact your financial future, and getting locked into a bad deal can haunt what should be a peaceful retirement. Ensure your interest rates and loan terms are satisfactory before signing on the dotted line, and enlist the help of an expert to be sure this decision is right for you. 

• Falling Home Values: Should your home value decline, you may be left with less home equity in retirement than previously planned. And while real estate is known to appreciate over time, variables out of your control like economic downturns or local market conditions can lead to temporary declines, lowering your home value and limiting your equity. 

• Long-Term Viability: Something like a HELOC may be the right fit for you now, but will it continue to support your needs in the future? When deciding if (or how) you should access home equity, your immediate needs should carry as much weight as your needs five, 10, or 15 years into retirement. 

While planning, introspection, and foresight can help you mitigate these risks, it’s best to consult a financial expert to protect your future.

Navigating the Process 

It can take quite a bit of work to decide whether accessing your home equity is the right path to a secure retirement –– and this work only continues once you begin the process of unlocking your home’s equity. From application to repayment, here’s what to expect. 

Application and Approval for Home Equity Solutions 

For products like a home equity loan and HELOC loan, the application process may closely resemble that of a traditional mortgage. This typically involves:

• Research and Comparison: Explore a variety of home equity options, including loans, HELOC, and reverse mortgages –– comparing the interest rate, fees, and terms included with each to find the best fit for your post-retirement needs.

• Application: Once you’ve determined which equity pathway is best, gather your necessary documents and complete the application process for your chosen home equity solution. While each product and lender varies, you may need to provide mortgage information in addition to proof of income and your credit profile. 

• Approval and Funding: If your application is approved, you'll be on your way toward receiving your retirement funds. Depending on your chosen product, this can take as little as a week or as long as a couple of months. Discover “How long does it take to get a home equity loan” for more details.

Strategies for Managing Loan Repayments During Retirement

The hard work doesn’t stop once your cash is in hand –– and managing loan repayment is the key to effectively leveraging your home’s equity. There are several ways you can ensure you’re making the most of your home equity: 

• Budgeting: If you have an existing budget, factor your monthly payments (if any) into your plan. If you’re starting from scratch, build your budget around these payments, prioritizing on-time payments. 

• Financial Planning: Working with a financial advisor to develop a long-term financial plan can ensure your overall financial well-being in retirement.

• Review and Adjust: Your situation may change from time to time, making it important that you regularly review your financial situation and make adjustments as needed. Being proactive will prevent short-sighted decision-making, keeping you on track toward your long-term goals. 

Know You Have Options With Your Equity

As exciting of a time as retirement can be, it can also be a source of anxiety for many. And whether you haven’t been able to plan for retirement the way you intended or you’re still looking for additional freedom during this time, your home equity helps you ease some of these anxieties. Your options for accessing this equity are also in no short supply, meaning there are countless ways to accomplish your goals. 

With that said, most homeowners probably don’t want to spend their retirement thinking about monthly payments and fluctuating interest rates. That’s why Truehold’s sell and stay transaction offers the benefits of home equity without these downsides. Unsure about moving after retirement? Fortunately, when you sell your home, you get your equity without having to move out, without the stress of monthly loan payments, and without paying thousands in interest. You simply continue to live in your home as a renter, use your equity how you please, and enjoy the retirement you’ve always dreamt of. 

Want to learn more about how Truehold’s sell and stay transaction can help you secure your retirement? Chat with a representative today.

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Sources:

1. Rocket Mortgage. Can You Deduct Your Home Equity Loan Interest? https://www.rocketmortgage.com/learn/are-home-equity-loans-tax-deductible

2. Nerdwallet. How Much Should You Save for Retirement? https://www.nerdwallet.com/article/investing/how-much-to-save-for-retirement

3. Bankrate. Using home equity in retirement. https://www.bankrate.com/home-equity/using-home-equity-in-retirement/#what-is