Many seniors and retirees are being hit with a double whammy these days: Inflation is quickly approaching 10%, and their retirement investments might have dropped by 10% to 20% due to recent declines in the stock and bond markets. At the same time, however, it’s possible that their home equity has appreciated significantly, which could be a tempting target to tap to help make ends meet.
When it comes to tapping your home equity, there’s no “one-size-fits-all” solution. You’ll want to do your research to determine the method that could work best for you. Let’s look at several ways to deploy your home equity to help finance your retirement—each with its own pros and cons.
Downsize. You might be able to sell your home, realize a capital gain, and buy a home that’s less expensive to both purchase and maintain. In the process, you might find one that better meets your needs in retirement, compared to that larger three- or four-bedroom home in the suburbs that requires more maintenance and a car to get around. The trouble is, any potential retirement house you consider may have recently appreciated as much as your current home. So, you’ll want to do your homework to see if you can realistically reduce your living expenses or realize capital gains that you can reinvest for retirement cashflow.
Take out a reverse mortgage. A reverse mortgage can be used in a variety of ways to help finance your retirement. You can use a reverse mortgage to purchase a new home without a required monthly mortgage payment, provide money to finance enhancements to your current home, provide a line of credit to tap as needed for living expenses, or produce a stream of regular monthly cashflow. You don’t need to repay the reverse mortgage loan until you sell the house, although most reverse mortgages will allow you to pay down the loan, if that’s a desirable goal.
There are many details you’ll want to investigate with a reverse mortgage, including their terms and costs. You’ll also want to seriously think about any misconceptions you might have about this option. “Some retirees want to preserve their home equity as a legacy for their adult children, but their children might say they’d prefer that their parents use the equity to secure their lifestyle,” according to Kirsten Sieffert, CEO of Finance of America Reverse (FAR).
As part of your research, you might want to explore recent innovations in reverse mortgages. For example, FAR recently pioneered a product that starts as a traditional mortgage and helps home owners build home equity, then automatically converts to a reverse mortgage in 10 years to eliminate the mortgage payment. This type of mortgage could be useful for pre-retirees who are several years away from retirement.
Home equity line of credit (HELOC). A HELOC is a loan that you can draw upon as needed during the “draw period,” which is commonly 10 years. During the draw period, your loan accumulates with interest and you don’t need to make loan payments (although you can pay down the loan, if you prefer). At the end of the draw period, you’ll need start repaying principal and interest. HELOCs can help bridge the time until you begin drawing retirement income, such as Social Security or an annuity. HELOCs can also be useful if you expect to sell your home before the draw period ends.
Equity sharing agreement. A home equity sharing agreement allows you to collect a cash payment in exchange for giving an investment company a specified ownership percentage in your home. With this type of agreement, you don’t have to make a monthly payment or pay interest. At the end of the specified term, which can range from 10 to 30 years, you pay the investment company the cash payment it gave you, plus a percentage of the appreciation in your home.
These products can help homeowners who are cash poor but have substantial home equity. Before choosing this option, you’ll want to investigate—and make sure you thoroughly understand—the terms and conditions, which can be complicated and costly. More importantly, you’ll want to plan ahead for the possibility that you’ll need to sell your home at the end of specified term.
Add an ADU. You might be able to add an accessory dwelling unit (ADU) that you can rent for extra cashflow. ADUs can be a stand-alone building, a converted garage or basement, or an extension added to your current home. One “thinking ahead” retiree I know built an ADU that generates current rental income. When she becomes less active in her later years and may need additional income to pay for care, she plans to move into the ADU and rent out the main house for higher income. One possibility to consider: You could finance an ADU with a reverse mortgage or a home equity line of credit.
House share. If you really like your three- or four-bedroom home but have one or two spare bedrooms, you might consider renting out one or two rooms to supplement your retirement income. An added bonus can be additional companionship for lonely retirees. According to the online real estate marketplace Trulia, older Americans own nearly 3.6 unoccupied rooms that could be rented out.
Of course, there are logistical details that need to be worked out when you share your living space with others. To help with that, you might want to utilize services like Silvernest that can help you find and evaluate roommates and work out the necessary arrangements.
Multi-generational housing. A variation on house-sharing is for grandparents to share a home with their adult kids and/or grandkids. Not only will you be able to share living expenses, but this option help grandparents feel useful and combat loneliness by being built-in babysitters, helping the parents in the process.
Rent swap. One creative couple rents out their three-bedroom home and uses the rent money to fund an extensive road trip. A variation on this idea could involve renting a smaller and less expensive home. The difference in rent payments could give retirees some extra cashflow, while preserving their home that they own if it doesn’t work out.
If any of these ideas strikes a chord with you, be sure to carefully explore each idea and consider all the ramifications. Hopefully this list has helped stimulate your imagination to explore some ways you can take the sting out of inflation and stock market volatility.