Home Equity Can Help Finance An Earlier Retirement
So, youre getting older. Youve worked a lot of years at your current job and youd like to retire to spend more time with family and friends, or maybe enjoy that vacation youve always dreamt of taking. But, like a growing number of working adults in America, you dont think you can afford it. Youre certainly not alone in this thought. According to a recent Wells Fargo survey, 30 percent of middle class Americans join you in thinking that they, too, cannot afford retirement until they are at least 80.
Whats keeping these Americansand youfrom an early retirement? The recession and tougher economic times probably have something to do with it. Never fear, though. In order to afford a retirement, all you need to do is look towards your home. Here are several ways that your home equity can help your retirement planning.
If you plan to refinance for extra money during retirement, now would be the best time to do it. A refinancing application takes into account your annual income at the time the application was filed, so the more you make, the more likely you are to be approved for a refinance. Waiting until you are in retirement to apply for a refinance will make it pretty near impossible to be approved.
That being said, a refinance can save you a lot of money per month if done for the right rate. Depending on your credit score, monthly income, and loan type, refinancing could mean the difference between just getting by during retirement and having enough for vacations and other activities. However, before deciding on this option, look into other ways of utilizing your home for retirement.
Home Equity Loan/Line Of Credit
Another option for retirees who want to tap into their homes equity for extra cash each month is a home equity loan or line of credit. For those unsure of how much they will need, a home equity line of credit (HELOC) is a great option. In a nutshell, a HELOC allows you to take out what you need, like a credit card. So, if you overestimate how much you need, theres no harm done. On the other hand, if you have something specific in mind (like the vacation youve wanted to take for years), then a home equity loan might be the better option for you. With a home equity loan, you can take out exactly the amount you need and repay it as if it were a regular loan.
There are also benefits of a HELOC that you might not get with a more conventional loan or a home equity loan. For example:
- Since your HELOC is secured by your home, the interest rates are lower than on a normal loan
- Many have flexible payment plans
- The interest is tax deductible
- The credit limits are fairly high
If you miss enough payments on these loans, though, you could risk losing your home to your lender. So, proceed with caution and only take out what you can afford to put back in later.
Similar to HELOCs and home equity loans, a reverse mortgage allows you to tap into the equity you already have in your home. However, unlike those loans, it has several restrictions which make it harder to obtain. For example, those who obtain a reverse mortgage program must be 62 years or older and must own their homes. So, when the homeowner dips into the home equity in the home, the lender is essentially buying back part of the home until the homeowner can repay the loan.
Rather than making payments to the lender, in a reverse mortgage, the lender makes payments to you in exchange for equity in the home. When you move out or pass on, your heirs will inherit the house, but a lien will be on it, so they (or you, if you simply moved out) will have to pay the lien.
If you have completely paid off your home, another option you can take is to sell your current home and downsize to something more affordable. This is an especially good idea if the market is good and you dont need the space your current home has. Doing so will give you instant cash to invest, save, or otherwise use as you see fit.
However, it is important to be realistic about how much money youll make off your home and how much you can afford for a new home. Before putting your home up for sale, check online to make sure that the market is right to net you the money you need for retirement. If conditions in your area are less than ideal, you might want to reconsider downsizing in favor of another plan that will get you more money.
No matter what road you take, tapping into your homes equity can help you fund an earlier retirement than you initially anticipated. Just be aware of the pitfalls of these methods so you dont end up in too much debt.