Traditionally, seniors don’t tap into their home equity for retirement income.
“I believe many people in their 70s and 80s look at it as welfare,” says Mary Russell, broker/owner at Mortgage Results in Aptos, Calif. “They feel they won’t be able to leave anything for their kids, and their kids are against it, too, because it takes away from their inheritance. That’s not true.”
Russell has worked with many people during their retirement years to use the equity in their homes. It all comes down to the fact that if they have equity in their home, they can use it to live a better life, pay for remodeling or a grandchild’s college, or do anything else they want.
According to a recent survey by Voya Financial, 85 percent of non-retirees said they want to own their own home in retirement. However, a quarter of retired respondents revealed they still had a mortgage, and over half of this group had a balance of $50,000 or more.
Yet, even with mortgage balances, retirees can use their equity in various ways to change their lifestyle or lessen their financial worries during retirement.
Here are a few ways equity can change seniors’ lives:
A cash-out refinance is a new mortgage results in the borrower getting cash in hand at closing or paying off debt that was not used for the purchase of the home. Cash-out refinances can help improve cash flow by paying off other debts with higher interest rates or payments.
These refinances can also be good sources of funding for education for children or grandchildren. The money can be used for just about anything including home improvements, investments or medical bills.
Home Equity Line of Credit (HELOC)
A HELOC works like this : a lender agrees to give up to a certain amount based on the homeowner’s equity over a fixed time. This allows the retiree a revolving access to approved funds. Unlike credit card debt, HELOCs are secured by the equity and present less risk to lenders, according to the Urban Institute study titled Seniors’ Access to Home Equity.
Charitable Home Remainder Annuity
It’s another planning tool, Russell says. It lets you convert your real estate into lifetime income. It reduces your income taxes now and estate taxes when you die. You pay no capital gains tax when the asset is sold. Basically, you will your home to a charity in return for an annuity that lasts the homeowner’s lifetime or another set amount of time.
Sell the home
This can give seniors a chance to downsize, rent or buy into a retirement community or long-term care community.
This growing trend helps retirees share their extra private spaces with the appropriate adult guests. Many states, cities and senior organizations have begun to help match seniors which helps bring in extra income, reduces the load of household chores and gives instant companionship.
For instance, the New York Foundation for Senior Citizens’ free Home Sharing Program helps link these home sharers. One of the home-sharers must be age 60 or older. Professional social work staff comprehensively screen and check the references of all host and guest applicants.
Russell says that each retiree who is looking to increase their income should talk with their financial professionals and family members to talk about options and what would be best for their situation – financially and emotionally.
Use a reverse mortgage
Also called Home Equity Conversion Mortgages or HECMs, are government-insured loans allowing those 62 and older to extract from their home equity. There are many types of reverse mortgages; ones that pay off our existing mortgage and giving you extra cash; others that give out monthly payments; and others that give a lump sum.
Russell works with many who use reverse mortgages to change their lives. She believes many people are confused and turned off of reverse mortgages because of past bad media. The Department of Housing and Urban Development and the Federal Housing Administration (FHA), which are responsible for many of the reverse mortgages, released new rules and regulations, she adds.
“In the past, people felt that the bank owns their house, and they will take it away from them,” she says. “And in the past, they used to. If one of the spouses died, the other was kicked out. That can’t happen anymore with reverse mortgages.”
According to the National Reverse Mortgage Lenders Association, today’s reverse mortgages are determined by a formula based on the home’s appraised value, the youngest borrower’s age and current interest rates. And counseling is required for all HECMs.
Reverse mortgages can help seniors get money for their grandchildren’s education, they can travel the world, they can repair their home, or they can get home healthcare. There are so many options when using a reverse mortgage, Russell adds.
One client who used a reverse mortgage was the mother of one of Russell’s friends, who was 94. She wanted to stay in her home but nursing expenses to keep her there had risen to $14,000 a month. She owns a $1.5 million home in California without any payments left on it. A reverse mortgage gave her $14,000 a month so she can stay in her home and have the nursing taken care of.
“Now, her daughters don’t have to bring mom into their homes, and everybody wins. That one did my heart good,” Russell says.