Retirement Planning

 

Home Equity and Retirement


Should you consider your house an asset that you can tap into during retirement? There’s many different opinions on this theory. Whether you are working or retired, you’ll need a place to live. If you plan to use your house as income after retirement, you may be forced to move into a retirement community and pay closing costs, moving fees, etc. Additionally, if you had not finished paying off your mortgage, you will not get the entire purchase price of your house.

If you want to get money out of your house but aren’t quite ready to move yet, you have a few options, depending on your age and situation.

Home Equity Loans or Home Equity Lines of Credit

With a home equity loan, you get a loan or line of credit using your home’s equity as collateral. It’s like a second mortgage that gives you back the money you’ve paid toward your house to use for home improvements, education costs, or more.

A home equity loan is a long-term loan that is paid back at a fixed rate over a specific period of time. A home equity line of credit (HELOC) is more like a credit card because it has a revolving balance. Rates are typically low, but the loan will need to be paid back. This may help you cover other costs and continue contributing to retirement during your 30s and 40s. For more information on home equity loans or HELOCs, read “Home Equity Basics” on bankrate.com.

Reverse Mortgages

Another option for people over 62 who own their home is a reverse mortgage. A reverse mortgage allows people who have value in their homes to receive cash loans. If you own your home and find that your retirement savings are not enough, a reverse mortgage can help by making the equity in your home available to you. When setting up reverse mortgage, the cash can be paid:

  • In one lump sum
  • In monthly payments
  • As a credit line, allowing access when needed


No Payments

Typically, reverse mortgages need not be repaid until the recipient moves from their home. This means that there are no monthly payments.
But there’s no such thing as a free lunch. Unlike a typical mortgage—where your home equity rises and your debt rises—in a reverse mortgage, your home equity declines and your debt rises. The exchange of equity for cash lasts until the owner moves out of the home.

If you are considering a reverse mortgage, visit the AARP's website for more information.

Now that you know roughly how much you need to save for retirement and how you can save it, we should talk a little bit about how strategy changes based on your current age and length of time until retirement. The next section will guide you through retirement planning in your 20s until the day you turn 65 and beyond.

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