Retirement is an exciting and rewarding time to relax and enjoy the fruits of your labor after decades of hard work. If you’re retired or you’re about to retire, you may be wondering what’s next. If you’re thinking about how you can make the most of your assets, you’ve come to the right place. Let’s take a look at how retirees can make the most of home equity.
What is Home Equity?
Home equity is the difference between the current appraised value of your home and the outstanding balance of your mortgage. To put it simply, home equity is the amount of ownership you actually have in your home. For example, if you owe $200,000 to your lending institution for your mortgage loan and your home is worth $250,000, you have $50,000 equity in your home.
Can equity increase or decrease? Yes, your home equity can both increase and decrease, depending on different circumstances. With each mortgage payment, you make your equity rise. Mortgage payments increase equity by decreasing the amount owed on your mortgage and increasing the true amount of homeownership.
Equity can decrease if your home value drops at a faster rate than you’re making your mortgage principal payments. Home value can decrease for the following reasons:
Natural disasters
Consistent foreclosures in your neighborhood
Lack of community maintenance and upkeep
Lack of amenities, etc.
Now that we’ve taken a look at what home equity is and how it works, let’s take a look at how you can make the most of home equity.
Cash-Out Refinancing
Cash-out refinancing is replacing your existing mortgage with a new one that reflects the current appraised value of your home. With this method, you’re able to cash-out with your equity difference. The exact amount you’re able to get depends on your specific agreement with your lending institution. With the cash you receive you can pay off credit card debts, improve your home, or meet other financial needs that you may have.
Sell Your Home
Retirement is a perfect time to sell your home. More often than not, your need for a daily commute will be eliminated, as well as, your need for living close to business establishments. Get away from the hustle and bustle and consider selling your home.
When you sell your home, you can downsize with cash on hand from the sale. With the additional cash from your sale, you can invest in rental properties or other businesses that will guarantee a sure monthly income with minimal effort. You may also want to consider moving to a cheaper retirement-friendly neighborhood. Neighborhoods like these are perfect for hosting intimate birthday parties and gifting sentimental gifts to your loved ones.
Selling the home you’ve lived in for many years may seem scary. But remember, making a house a home is simple. All you need is love and a few personal touches. Make your new retirement home extra cozy with furniture for your grandkids or framed birthday cards. Items like these will ensure that your new home feels just right.
Home Equity Borrowing
A home equity loan is a second mortgage that gives you access to a lump sum payment. With your lump sum payment you can:
Remodel your home to make it retirement-friendly. This is a perfect option if selling your current home is non-negotiable for you
Finally have the kitchen, bathroom, or living space of your dreams
Make your backyard an ideal hang out spot for yourself, your grandkids, or friends to enjoy time outdoors
Make your home a loving oasis of beautiful memories of the people closest to your heart
Reverse Mortgage
Typically, homeowners age 62 and above and are eligible to take out a reverse mortgage. When you take out a reverse mortgage, you’re borrowing against the value of your home. Depending on your agreement with your lending institution, you will receive one lump sum payment or monthly payments over an extended period of time. Reverse mortgages tend to be more complex and are not the right fit for everyone. However, they are still an option nonetheless.
Conclusion
After spending a long time contributing to the workforce, your retirement period should be as stress-free as possible. Before deciding which method of home equity cashing out you’d like to pursue, you should always:
Research extensively - Make sure you fully understand all of the pros and cons of a potential agreement before signing off on it. Alongside doing your own research, you should also speak to a loan specialist from at least one or two lending institutions. Each institution will have different rates and agreements.
Be responsible - It’s easy to get carried away when you are granted access to large amounts of money. However, it’s important to remember that with most of these agreements you are putting your home up for collateral. Before making a final decision, ensure that you can effortlessly keep up with your loan payments.
Congrats on your retirement! Enjoy it, you deserve it.
