The Washington PostDemocracy Dies in Darkness

Should you tap into your home equity to fund your retirement?

Understanding your unique financial situation and how much it will realistically cost you to live in retirement is the first step in creating a foolproof plan for your future. (iStock)
Placeholder while article actions load

If you’re in good shape with your home mortgage —meaning it’s mostly or fully paid off — it might make sense to tap into your home equity to help reach your retirement goals.

The strong stock market and a new perspective from the coronavirus pandemic may have you considering home equity as a way to accelerate a move in retirement, or as a way to renovate your current home for a more comfortable living space as you enter your golden years.

However, using home equity for retirement is not always an easy decision. It should be done at the right time and for the right reasons. Here are considerations to help you understand whether this move is for you.

Accessing home equity

There are several ways you can leverage your home equity for retirement. A few common options include:

Refinancing your mortgage. As a homeowner, refinancing is always important to keep in mind —especially with interest rates still at historical lows. Locking yourself into a lower mortgage rate will cut down your monthly payments and could save you thousands of dollars in in­terest in the long run.

More Mount: Building your dream house or renovating? What to know about construction loans.

When refinancing, you can look into saving even more in the process through a no-cost refinance. With a no-cost refi, the lender increases your interest rate by a quarter of a percent and waives a significant amount of fees. Depending on how much lower your new rate is, you’re also not on the hook to come up with any cash to complete the transaction.

Taking out a home equity line of credit. With a HELOC, you can borrow against the equity that you hold in your home. This allows you to take advantage of low rates, open a new line of credit and use your funds more strategically. However, interest rates on home equity lines of credit tend to be variable, so keep in mind that there is potential for higher costs if interest rates go up.

Taking out a reverse mortgage. Reverse mortgages are a viable option for those with limited access to funds and a sizable amount of equity in their home. You can either take out your equity in its entirety or opt to receive smaller amounts on a monthly basis over a longer period of time. Reverse mortgages are a bit more complex compared with a refinance or HELOC, so it’s important to do your research and speak with a loan specialist.

Downsizing. Perhaps the most obvious option to help fund your retirement is to sell your home and move to a smaller place or less expensive region. You can either use the difference from your old home equity as income, or put it to work by investing it into your portfolio. If you can, it’s worth strategically reinvesting your assets and allowing them to grow over time to give you an extra layer of financial security — and in some cases — more spending power in relation to your long-term retirement goal.

When to tap home equity

While tapping into your home equity to help fund your retirement is a viable option for many, understanding your unique financial situation and how much it will realistically cost you to live in retirement is the first step in creating a foolproof plan for your future.

More Mount: Is now the right time to buy a home? Three factors to consider before making an offer.

Overall, using home equity toward retirement works best for those with a high level of equity in their home. It can help you secure your next property purchase, provide opportunity to capitalize on investments or pay down debts, and help grant you long-term financial security.

On the other hand, tapping into your home equity as a form of income can be potentially hazardous if you’re not fully aware of how the process works and what the potential outcomes could be. It’s important to remember that your home is not a liquid asset, and you should always avoid using equity in a manner that creates an unaffordable situation.

As with any big financial decision, you should work with a financial adviser to create a plan and strategize scenarios that will help you stay financially independent into and through retirement.

David Mount is a director with the Wise Investor Group at Robert W. Baird & Co. in Reston, Va. Baird does not provide tax, legal or real estate advice, and does not provide or service mortgages.

Read more in Real Estate:

Building your dream house or renovating? What to know about construction loans.

Is now the right time to buy a home? Three factors to consider before making an offer.

How much can you afford to pay for a home?

Loading...