How to Leverage a Home's Equity at Retirement
Retiring means finding a new way to manage your money to achieve the standard of living you seek while in your post-work years. But without income, this task is easier said than done. Leveraging your home's equity offers one way to manage retirement finances, but it can be risky unless you take precautions.
Retirees who own their own home can leverage the property with a home equity loan, which is a bank loan for a portion of the value of the equity you have in your home. A home equity loan arrives as a lump some and needs to be repaid by a predetermined date. Another option is a home equity line of credit. This is a line of credit that you can borrow against as needed, repaying only what you spend, as with a credit card. A reverse mortgage is another option that might be available to you as a retiree.
Knowing your home's value is essential to leveraging your home's equity. The amount you can borrow will depend on the value of your home and how much you still owe on any mortgages. If you still owe a substantial mortgage debt, you will have much less to leverage. Financial institutions offer different terms for reverse mortgages, so be sure that you understand the repayment plan and the alternatives available before settling on a way to leverage your home equity. Once you know which option is best for you, you can submit an application.
Leveraging your home's equity carries all of the risks of a home loan, with some additional risk. A loss of pension income or a reduction in investment income may prevent you from repaying your debt, which may lead to foreclosure. If you die before repaying your debt, your heirs will be responsible for the debt and might not be able to inherit your home. If the value of your home falls, you'll still be liable for the value you leveraged, which might mean paying off a large loan while watching your equity in your home continue to shrink.
One question to ask yourself at the outset is, "Why do I need to leverage my home's equity?" If you're planning to use a home equity loan to take a trip or buy a new car, you might want to reconsider taking on such large expenses at a time when you are living on a fixed income. If you're looking to cover the cost of living expenses, selling your home outright and downsizing into a smaller home that better fits your needs, family size and budget might be a better alternative that avoids taking on debt.