In a previous article, I addressed the issue of retirees whose nest eggs have dropped to the point of threatening their long-term financial stability. I discussed two potential solutions: the Band-Aid approach, in which retirees make small living adjustments, and immediate annuities, which provide retirees a stable income. In this article, I will present a third solution: home equity.
Why Home Equity?
Home equity, in many cases, is the largest asset retirees own. Yet most people don’t consider their home an investment that can be used for retirement cash flow. Ignoring home equity might be fine for those with adequate retirement portfolios; it’s not fine for the rest. Tapping into home equity is sometimes seen as financial suicide, much like holding balances in high-interest-rate credit cards. This is not necessarily true. There are two preconceptions to using home equity that we must tackle:
It’s financially better for me to own my home free and clear.
Maybe so, but would you rather not have enough money to live on? Your house has grown in value above what you paid, so why not give yourself the benefit of the gain?
I won’t be able to leave the house to my kids.
You can still do that, but it might have a mortgage attached. Chances are, your kids will sell the house. They’ll still get an inheritance even after paying off the debt. And besides, would your kids rather inherit a house free of debt or not have you financially dependent on them?
How to Use Your Home’s Equity
There are various ways to gain access to home equity. These can include changing debt structure, changing residence, or using a reverse mortgage, and each can have financial, lifestyle, and tax impacts. Let’s look at each strategy.
Debt Structure
For home-owning retirees, most will either own their home outright or have a mortgage for substantially less than the value of their home. If the retiree owns the home free and clear, borrowing against the equity can be a source of funds. For example, let’s say that Leslie is 75 years old and owns her home …….
Source: https://www.morningstar.com/articles/1085311/how-to-use-home-equity-to-fix-retirement