If you or your client are at retirement age or within a few years of retiring and don’t have enough saved, what’s the back-up plan?
Most Americans are going to need one, according to the numbers.
It’s a finding that’s doubly true now that the pandemic has wreaked havoc on many Americans’ retirement accounts.
Reasonable back-up options include working longer, delaying Social Security benefits, and lining up a part-time income in retirement.
Reducing the cost of living will almost certainly come into play.
But there’s another back-up plan that can work especially well when the timing and circumstances are right.
This particular back-up plan allows for retiring completely plus funding a retirement lifestyle, healthcare costs, home improvements (when needed for medical purposes), and even travel.
Tap into home equity to fund retirement savings! Here’s how:
3 Ways to Use Home Equity in Retirement
There are a few ways to use existing home equity for income.
- Home Equity Lines of Credit (HELOCs), which are comparable to credit cards, give the option to borrow up to an approved limit as needed. There’s typically a draw period and a repayment period. Borrowers pay a variable interest rate on the loan amount, but only on the money actually withdrawn. To apply, applicants must have at least 20% equity in your home.
- Home Equity Loans, or second mortgages, allow borrowers to convert equity into cash and receive that cash in a single lump payment. Borrowers make regular payments to pay off the principal and interest usually at a fixed interest rate. Like HELOCs, borrowers must have at least 20% equity in the home.
- Reverse Mortgages make it possible to borrow against the value of a home either by taking a large lump sum or small debits monthly over a long period of time. Instead of making mortgage payments to a lender, a lender pays the borrower based on a percentage of their home’s value.
When a Reverse Mortgage May Be Best
Reverse mortgages are ideal for those 62 or older who are planning to stay in their home for the long-term, and want their home to become part of their estate. There are no income requirements, but the homeowner will need to continue making yearly property tax and insurance payments. The loan becomes due should they move out or pass away – or fail to maintain the property and keep up with yearly taxes and fees.
In an ideal situation, the home is willed to heirs who will be able to sell it at market value (or more) and pay back the reverse mortgage.
When a HELOC May Be Best
HELOCs can be applied for at any age, but just as with the mortgage process, applicants will need to be approved. Loan officers will figure in factors such as your credit score, current debts, and income. This option is ideal for short-term cash for short-term expenses and when borrowers are able to keep up with monthly interest payments.
They’re also a good choice if the borrower isn’t sure how much money they’ll need to borrow and need ongoing access to funds. Keep in mind though that HELOC interest rates are variable and tied to the prime rate.
When a Home Equity Loan May Be Best
Home Equity Loans also can be applied for at any age and borrowers will need to be approved similarly to the HELOC process. These loans are generally taken out via a lump sum with a fixed interest rate. They’re good options for when borrowers know exactly how much they need to borrow and what they plan to use the money for, like home improvements or fixed healthcare costs.
Talk with an Expert to Weigh Your Retirement Income Options
There are pros and cons abound when considering how to leverage home equity for retirement income. First and foremost, speak with a knowledgeable loan specialist about the options and determine the route that’s best for you or your client.
Weighing the possibility of a reverse mortgage? Contact us at (504) 833-2111 or reach out to one of our reverse mortgage specialists who can talk with you in-depth about whether it’s the ideal choice.