Many baby boomers are moving into retirement, but unfortunately many of them don’t have sufficient savings to meet their basic retirement needs. The Employee Benefit Research Institute states that, “Boomers are woefully unprepared for retirement. In order to meet their income needs, baby boomers need to rely upon three major sources of wealth: retirement savings, Social Security and home equity.” While social security often gets a lot of attention, using home equity as a way to help fund one’s retirement is often overlooked. According to a recent article by Jamie Hopkins, retirement income program co-director at The American College of Financial Services, “Not only is the home one of the largest sources of a retiree’s wealth, it also represents one of the main retirement-planning decisions: where to live in retirement.”1
In the past, retirees freed up home equity by downsizing to a smaller, more affordable home. “However, a recent AARP study showed that nearly 90 percent of people over age 65 want to stay in their current home for as long as possible and age in place…” Therefore, it makes sense for boomers to look at ways their home equity may be able to help them meet their income needs, without giving up the ability to age in place. Three such strategies for utilizing one’s home equity are outlined below.1
A HELOC, or Home Equity Line of Credit, is a more traditional way to access one’s home equity. According to the article, a HELOC “…is typically best used in retirement for short-term needs or meeting unexpected expenses.” The funds from a HELOC can be used for any reason, however qualifying may be difficult if you’re no longer working and don’t have an income. Lenders want to ensure that you have sufficient cash flow to pay the loan back.1
A Home Equity Conversion Mortgage line of credit is another option to consider. A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors age 62 and older to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3 With a reverse mortgage, you continue to own your home. A HECM can also be used as part of a comprehensive retirement plan. For example, you could use your home equity through a HECM line of credit to meet your income needs, rather than selling your stocks in a down market or depleting your savings too quickly. A reverse mortgage may not be the right product for every situation, so it’s always best to consult a trusted advisor.
Another way to use your home equity is through a sale-leaseback. This allows homeowners to sell the home, while at the same time, contracting to rent the home back. This type of transaction not only enables seniors to unlock their home equity, but also allows them to continue living in their home. When used in retirement, sale-leaseback transactions between parents and children are common. “Often, the children buy their parents’ home so that their parents can have income without giving up their lifestyle and without making the transaction feel like a handout to the parents.”1
If you’d like to learn more about HECM reverse mortgages, please use our Reverse Mortgage Calculator or call 800-218-1415.
1 Cash-strapped boomer? You can retire using home equity – cnbc.com, by Jaime Hopkins, 4/13/16, http://www.cnbc.com/2016/04/13/cash-strapped-boomer-you-can-retire-using-home-equity.html?&tc=eml.
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz