In 2021, 66.9% of Americans aged 65 to 74 retired, a 2 percent uptick from 2019. If you, or someone you know, was among these newly retired Americans, there may have been some serious conversations about how current living situations fit into the new equation. You may have been thinking about downsizing or moving closer to the grandkids. One approach to marching into retirement is by tapping into your home's equity.
What is Home Equity?
Home equity has seen a sharp increase in the past year, with the average U.S. household sitting atop over $22.7 trillion. Measured by the home's value minus mortgage debt, home equity is owned by you, not another party. Depending on how long you have had your home, you may have built up enough equity for a down payment on another property. For example, if you purchased a house five years ago, the home's price appreciation would sit at $125,300.
Get the Most Out of Home Equity
A universal choice for retirees is selling their homes and downsizing to a neighborhood with a lower cost of living. Doing so allows an individual to pocket the difference and invest the freed-up equity towards additional income. However, you may not be entirely ready to let your home go. In that case, consider converting the property into a rental; this way, you have the option of returning it to the family.
Beforehand, you will want to confirm renting is kosher in your neighborhood by asking your real estate agent or homeowners association about rental laws in the area. Then determine whether you want to manage this throughout your retirement. Consider the hassle of being a rental property owner and its potential financial impact. With the taxable rental income, you will notice added tax obligations.
If Selling Isn't for You
As a retiree, you may have decided you never want to part ways with your home but still want to experience the benefits of home equity. One of the easiest ways to access home equity is through a HELOC, whereby the house is used as collateral. It allocates a portion of the finances that can be borrowed against the equity in your home, which you can put towards enhancing the value of your home or personalizing it towards your future lifestyle. However, it is recommended to use a HELOC for essential expenses; continue to live within your means.
Another option is a reverse mortgage, specifically a home equity conversion mortgage (HECM). By qualifying for a reverse mortgage, you can tap into your home's equity to cover expenses or meet retirement income needs. With a HECM, a person aged 62 and older is allotted a fixed monthly payment, with accrued interest towards the overall balance. While the loan doesn't have to be paid off until you decide to move or sell, it's important to note that your successors will need to repay the loan.
Speak with a Trusted Real Estate Experts
As you begin preparing for retirement, it's essential to consider all your real estate options. Contact the team at NMC Realty Group for a breakdown and what may work best for you.