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Homeowners ages 62 and older are now sitting on $6.9 trillion in home equity, according to the National Reverse Mortgage Lenders Association.
For many households, their mounting home equity is the largest component of their personal wealth, according to the trade association. Retirees can cash in on the value of their home in several ways, including the following:
1. Reverse mortgage
Reverse mortgages are available to folks who are at least 62.
They enable you to tap your home equity for extra cash. You receive funds — and incur interest — but you won’t have to repay the money until you leave the home.
Reverse mortgages can be ideal for retirees who need more cash flow but don’t care about leaving their home to heirs.
Money Talks News founder Stacy Johnson explains in “Ask Stacy: Should I Get a Reverse Mortgage?”
“The typical reverse mortgage borrower will stay in their house for life. After their death, their estate will sell the house and pay off the loan, or simply turn the house over to the lender. If the sale of the home isn’t enough to pay off the loan, that’s the lender’s problem. Once you’ve given up the house, your obligation is over.”
If you want loved ones to inherit your home, however, consider “10 Alternatives to a Reverse Mortgage.”
2. Sell your home
Perhaps a more straightforward and less risky way to convert your home equity to cash is sell the property.
Of course, this option isn’t for retirees who want to spend the rest of their lives in their current home.
On the other hand, selling may be perfect for retirees who are willing to downsize for their golden years. You will both free up cash and save money on maintenance costs, utility bills and likely property taxes while living in the smaller home.
As we noted earlier this year in “7 Ways to Fatten Your Bottom Line in Retirement,” now may be a great time to make the move, while home prices are still near record highs in many markets.
3. HELOCs and home equity loans
Say you’re staying in your home for retirement but would like to do some remodeling to make it easier to get around your home as you age. A home equity loan or a home equity line or credit (HELOC) is an option to consider.
The former is basically a second mortgage, while the latter functions more like a credit card.
The trouble is that home equity loans and HELOCs are a lot less attractive than they were just a few years back, due to rising interest rates and tax reform.
The Federal Reserve just hiked the federal funds rate for the third time this year, and more increases are expected to follow. This upward trend tends to push other interest rates in the same direction, which can make many types of debt more expensive.
Additionally, after 2017’s tax code overhaul, the circumstances under which you can write off a home equity loan or HELOC interest payments have narrowed. We explain this further in “2 Things You Must Weigh Before Tapping Record-High Home Equity.”
What do you consider the best way for retirees to tap their mounting home equity? Share your thoughts below or on Facebook.