Inflation, Stock Market, Retirement – OH MY! Many cash-strapped, equity-wealthy – older Americans rely on a fixed income and their retirement assets, which may have suffered from stock and bond market losses.
Inflation is rapidly reaching 10%, and their retirement investments may have declined by 10% to 20% due to recent stock and bond market drops. At the same time, home equity is likely to have increased dramatically. Making it a tempting target to tap to help make ends meet. A reverse mortgage could be one way to get access to it.
There’s no “one-size-fits-all” accessing home equity. Research the best plan for you. Let’s look into how to use home equity to fund retirement.
Downsize.
You may be able to sell your property. Use that money to buy a house that will cost less and be easier to maintain. You may find a home that better suits your retirement needs than a larger house in the suburbs that takes more maintenance. The problem is that any potential retirement real estate you are thinking about may have suddenly become valued as much as your current residence.
Do your homework to see if you can minimize living expenses or realize capital gains to reinvest for retirement cash flow.
Get a reverse mortgage.
Retirees can use a reverse mortgage to assist in financing your retirement in a variety of ways. This type of mortgage can be used to purchase a new home without requiring a monthly mortgage payment. It can help age in place by funding improvements to your current home. It can offer a line of credit for living expenses or monthly cash flow.
You don’t have to repay the reverse mortgage loan until you sell the house. However, most reverse mortgages allow you to pay down the amount if that’s what you want. HECMLOCs are similar to HELOCs but have more protections for the borrower.
Reverse mortgage terms and costs should be considered. Clarify any misunderstandings about this option. The equity in the retiree’s home is a source of legacy wealth that many hope to pass on to their adult children. However, their children and grandchildren may prefer their parents use it to maintain their quality of life in retirement.
You might want to look into recent advances in reverse mortgages as part of your research. We offer a program that begins as a traditional mortgage and ends as a reverse mortgage. The hybrid program assists homeowners in building home equity. Then automatically switching to a reverse mortgage after ten years to eliminate the mortgage payment. This type of reverse mortgage may benefit pre-retirees a few years from retirement.
Home equity credit line (HELOC). A HELOC is a loan you can use whenever you would like during the “draw period,” typically ten years. During that time, your loan accrues interest, and you are not required to make payments. Although you can pay down the loan if you prefer.
You must repay principal and interest at the end of the draw term. HELOCs can help you bridge the gap between now and when you start receiving retirement income, such as Social Security or an annuity. HELOCs are especially beneficial if you plan to sell your house before the draw period expires.
Equity sharing agreement.
A home equity sharing agreement allows you to receive cash in exchange for a percentage of ownership of your property. You pay the investment company the cash payment you received plus a portion of the appreciation in your property at the end of the set term, which can range from 10 to 30 years. You are not required to make a monthly payment or pay interest under this agreement.
These solutions can assist homeowners who are short on cash yet have significant home equity. Before deciding on this choice, you should explore and thoroughly understand the terms and conditions, which can be intricate and expensive. More importantly, you should prepare for the potential of having to sell your property after the set term.
Add an ADU
You might be able to add an accessory dwelling unit (ADU) that you can rent out for extra income. ADUs might be a separate structure, a converted garage or basement, or an addition to your existing home.
Some retirees build an ADU that provides current rental income. Then intend to move into the ADU and rent out the main house when they become less active in their late retirement years and fund their long-term care. Financing is possible for qualified ADU with a reverse mortgage or a home equity line of credit.
House share.
If you enjoy your three- or four-bedroom home but have one or two extra bedrooms, consider renting one or two rooms to supplement your retirement income.
Of course, there are logistical aspects to consider while sharing your living space with others. You might prefer to use services like Silvernest. They help you identify and evaluate housemates and sort out the appropriate agreements.
Multi-generational housing.
A variation on house-sharing is for grandparents to live with their adult children and/or grandchildren. Not only will you be able to split living expenses, but this choice will also help grandparents feel useful. It may also prevent loneliness by acting as built-in babysitters, thereby assisting the parents. However, open communication and healthy boundaries are necessary to consider.
Rent swap or Air BnB.
A couple rents their three-bedroom home to fund a road trip. Or renting a smaller, cheaper property could be an option while renting out their larger home. The difference in rent payments may give retired homeowners extra cash flow while retaining home ownership.
If any of these ideas resonate with you, thoroughly research each and consider all the possibilities. Hopefully, this list has piqued your interest. We can help you with ways to mitigate the effects of inflation and stock market volatility during retirement. Give us a call!