Many Americans – especially baby boomers – hold a disproportionate amount of their wealth in real estate. On one hand, maximizing home equity in retirement is a worthy goal – we all want to be debt-free during retirement, right? On the other hand, home equity isn’t liquid when cash may be needed. The wealth contained in the home is a “nest egg” that is surprisingly like other forms of retirement savings. The big difference is that the home equity egg is often harder to crack.
Equity can be simply defined as what you own minus what you owe. Regarding your home, that is the appraised value of your home minus any mortgages, or liens, against it. While it is possible to access your home’s equity, you’ll want to be familiar with the options.
1. Sell the Home
Sadly, many retirees make the choice to sell the home prematurely to access their housing wealth. This solution is costly, disruptive, and may not solve the long-term problem of limited cash flow when rent payments are due.
2. Cash-out Refinance
This traditional form of equity release allows you to refinance your existing mortgage into a larger one, paying off your existing mortgage and pocketing the difference. This carries a monthly payment until the mortgage is paid off.
3. Home Equity Line of Credit (HELOC)
Your local bank or credit union will often allow you to access a portion of your equity. Think of this as a credit card secured against your home. You can draw up to your credit limit early in the process, but the limit can be reduced or eliminated as market conditions shift.
4. Equity Release
Many homeowners want to access home equity but are hesitant to take on new debt or move from the home. As a result, there is a growing market for alternate “equity release” strategies. These come in the form of sale-leasebacks, shared equity programs, and even systems that allow investors to buy a portion of your equity.
5. Home Equity Conversion Mortgage (HECM)
Also known as reverse mortgages, these can be a very effective way for homeowners, age 62 and older, to access housing wealth while having no monthly principal or interest repayment obligations. A government-insured product, the HECM allows the homeowner to access their funds in a lump sum, line of credit (LOC), or monthly payments.
6. Proprietary Reverse Mortgages
Once labeled “jumbo” products, these were only available for homes valued $800,000 or more. That’s no longer the case as proprietaries are becoming more attractive for moderately-priced homes and may allow for non-FHA approved condominiums. The upfront costs are often lower than a HECM as they don’t have a mortgage insurance premium.