Fall back on your home equity in your golden years

May 25, 2016
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Retirement is something most people think about and save for, right from the very beginning of their careers. But, there are roadblocks aplenty that come in the way of financially preparing for your golden years.

We live in an age where the average life expectancy is rising but the pension that has helped the previous generations has almost vanished. The fact of the matter is that most people on the verge of retirement have only one resource that can help them once they stop working—their home.

Most retirees have more money as home equity than what they have saved for their retirement. To know how much money you have in your home equity, subtract the money you owe on your Home Loan from the current market value of the property. Next, you need to understand if you need that money for retirement. For this, you can enter your income, excluding the value of your home equity, into a retirement calculator. This calculator is similar to a Housing Loan calculator, but will help you understand whether or not you’ll be able to live comfortably, without tapping into your home equity.

If it does look like you have to utilise your equity, then you have to make a plan to find the best way to handle it. Here are the options available to you, along with their benefits and obstructions.

#1 Sell and relocate

Most retirees think of selling their home after retirement and this is a feasible option. If you’re in this position, you might feel liberated to leave behind excess space and move to a smaller home. From a financial standpoint, moving to a less expensive house or neighbourhood will help strengthen your savings and lower your monthly expenditures. A better option would be to move into a flat, as you won’t have to worry about external home maintenance anymore.

However, relocating might be a bit problematic, especially if you’re on your own. Take the service of a moving and shifting company so that you don’t have much to worry about.

#2 Give your house out on rent

You can rent out your house for a year or more, while you move into a smaller place. This way you can pay your own rent and pocket the difference. You could also try turning a part of your house into an apartment, complete with its own entrance, kitchen, and bathroom.

This way you can cover all your housing costs with the rental income and also postpone selling your home for much longer.

#3 Avail of a HELOC

Sometimes you might have sufficient funds for day-to-day activities, but not enough to help you through emergencies like medical bills or a sudden home improvement issue. In such cases, you can avail of a Home Equity Line Of Credit (HELOC) to serve as an emergency fund.

Getting a HELOC allows you to stay in your own home and you’ll only have to pay interest on the amount you use on the drawing period, which normally lasts 10 years. This would work in your favour as the interest rates are low and the repayments minimal.

To obtain a HELOC, you will need to get your income approved, which can be a major issue if you’ve already retired.

#4 Make use of a reverse mortgage

A reverse mortgage is a special type of Home Loan offer that requires no monthly repayments and lets you access your home equity and defer the payment until you move out or pass away.

A reverse mortgage is very different from a HELOC, which can only be used for short-term borrowing. Here, you will receive financial backing for a long time in the form of monthly checks.

The fee associated with this loan is high, even though they are rolled up with one loan. A major issue is that a reverse mortgage tends to eat into your home’s equity and by the end, you might not be able to sell it for enough when you move out.

#5 Sell or lease the house to your kids

If you wish to pass on your home to your children, you can sell it to them and then pay rent to continue living there.

This way you get to stay in your house and ensure that the property is owned by a family member.

Your children will have to agree to the deal and must have enough cash to make it work. There might also be conflicts with your children, if you fail to make monthly payments or need them to make any repairs.

Your retirement is the best way to reap the benefits of a fruitful life. These methods will help you spend your golden days without any financial burden. However, be cautious with what home equity utilisation method you choose so that you don’t end up having unwanted legal and financial worries.

 

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