Seniors' homes are not only where they live but their largest financial asset. Over time, they accumulate equity, which is the share of the home they own, as a function of paying down the mortgage and rising home values. For retirees and those on fixed income, the ability to tap into this equity can be a lifeline, giving them some financial flexibility to help cover bills, fund home renovations or top up the family kitty in retirement. But accessing homeownership wealth is not a decision to take lightly, because there are advantages and risks to the various avenues available. Knowing these options is crucial for seniors and their family members who want to make decisions that are in their best interest financially and so they will be more secure in the future.
1. Reverse Mortgage
One of the most common ways for seniors to access their home equity is through a reverse mortgage. Very different from the typical process than most people are aware of when it comes to using a mortgage to buy a house, with a reverse mortgage you do not have to make monthly payments to a lender and it is the lender making the payments to the seller. Instead, a reverse mortgage provides homeowners age 62 and up with an option that allows them to use part of the home's equity for tax-free income without selling their home. Instead of making monthly payments, the loan balance grows over time, and is repaid when the homeowner moves out, sells the house, or dies. A reverse mortgage can be a source of much-needed cash, but is expensive with high fees, interest and eligibility standards. And borrowers still will have to meet property tax, insurance and maintenance expenses, or the loan could be in default. Seniors who are considering this option should meet with a financial adviser or housing counselor to make sure they understand the full terms and long-term effects.
2. Home Equity Loan
Or you can get a loan against your home with a home equity loan or a home equity line of credit (HELOC). In either case the home is used as collateral and non repayment carries the risks of foreclosure. Unlike credit cards or personal loans, these loans may have lower interest rates, but they still come with monthly payments that can take a chunk out of a retiree's budget.
3. Sell the Home
Another option to take advantage of equity is to simply sell the home, which may be an appealing option to retirees and those looking to downsize. Homeowners can tap the full value of their equity without borrowing or repaying on anyone else's timeline. For people who no longer want to maintain a large property, or who want to be closer to family or in a senior-friendly neighborhood, this approach may be attractive. But selling a home comes with costs, including real estate agent commissions, closing costs and, possibly, capital gains taxes. Just as important, the emotional connection to a familiar family home can make this decision very wrenching for many seniors.
4. Rent out a Portion of the House
Renting out a portion of the house might also be a way to earn income yet keep the house. This is a source of steady stream of revenue through which they can overcome borrowing or having to sell the property. But a landlord has obligations, too, from maintaining their property to managing its tenants (and potentially the duties of a legal nature, too). For seniors, they should think about if they are willing to live with other people or take the responsibilities that come with owning rental properties.
In summary, the fact that seniors can hold significant wealth as home equity is only to their benefit, if such wealth is stewarded responsibly. Whether it's by way of a reverse mortgage, home equity loan, selling or renting, each option comes with its own advantages and drawbacks. With proper due diligence and by consulting reputable financial advisors, seniors can make well-informed decisions that will boost their financial well-being and improve their quality of life in their twilight years.
