Your retirement. Your golden years to spend doing the things you enjoy – hobbies, travel, more time with family, and so on. But can you afford to live your post-paycheck life the way you always hoped?
Research from the National Retirement Risk Index estimates that more than 50 percent of households lack enough retirement funds to maintain their pre-retirement standard of living – even if they work until age 65.
It’s a scary statistic, especially if you’re approaching retirement age and don’t feel financially prepared to leave the workforce. Fortunately, even if you are facing a retirement shortfall, you do have options to help supplement your savings. For senior homeowners, those options could be in the walls around you.
Financial planning experts and academics from The American College, Boston College, Columbia University, and MIT, agree that incorporating home equity into a retirement plan helps savings last longer. The question is: what’s the best way to access your home’s equity? Here are three popular options.
1. The home equity line of credit (HELOC)
A HELOC allows you to establish a line of credit based on a percentage of the value of your home. You can then access this credit during a predetermined amount of time called a “draw period,” usually 10 years. During the draw period, you can borrow up to the designated amount while making monthly interest payments, and, if you choose to pay back on the principal, you can draw out again, much like a credit card. After the draw period when the HELOC resets, you are responsible for repaying the principal and interest either immediately or over a set period of time depending on the terms of the loan. You should be aware that if your home value depreciates, or if your financial circumstances change, the lender has the right to freeze your credit or even cancel your loan.
2. Reverse mortgage
A reverse mortgage is a loan that senior homeowners age 62 or older can use to convert part of the equity in their home into a usable asset, without giving up title or ownership of the house. According to Professor Wade Pfau of The American College, “the reverse-mortgage option should be viewed as a method for responsible retirees to create liquidity from an otherwise illiquid asset.”
Reverse mortgages are attractive to seniors, in part, because they require no monthly payment and do not have to be paid off until the last borrower permanently leaves the home. You have the option of taking the loan proceeds as a lump sum, a fixed monthly or tenured payment, or as a line of credit. Last year, more than two-thirds of borrowers took a combination of regular payments and a line of credit.
Reverse mortgages also feature a non-recourse provision that protects you from ever owing the lender more than the value of your home, even if the house is “underwater” when you are ready to sell.
You are still responsible for paying your property taxes, homeowner’s insurance, and upkeep expenses or risk the loan being called due and payable.
3. Cash-out refinancing
Cash-out refinancing allows you to refinance an existing home loan – hopefully at a lower interest rate – and also refinance the home for a dollar value higher than the remaining principal. This loan allows you to keep the money above the principal as liquid cash that can be used to pay down other expenses or fund your retirement.
Like your original forward mortgage, if you miss a monthly payment due to unanticipated expenses from a health care emergency or other life disruption, your loan could be called due and payable, and the lender could move to foreclose on your property. Retirees may also face challenges qualifying for a cash-out refinance because of underwriting standards that require a certain amount of monthly income.
4. Choosing The Right Plan For You
While all three plans have their appealing points, new consumer safeguards for reverse mortgages are fueling their popularity among seniors who want the benefit of no monthly payment, a loan that can’t be canceled or reset, and the option of a line of credit that increases over time.
If you’re interested in pursuing a reverse mortgage, the National Reverse Mortgage Lenders Association can help. Their Roadmap can guide you through the features and responsibilities of reverse mortgages and the process for obtaining one which includes meeting with a reverse mortgage counselor and a financial assessment.
Visit www.reversemortgage.org/equity to learn more about how the solution to your retirement may have been under your roof all along.