Retirees who own their homes outright are often at an advantage over their renting—
and retired—counterparts. There are two reasons for this: their housing costs are generally
lower, and they have access to safety-net cash in the form of home equity.
However, all homeownership is not created equal. For example, if you move often, owning
a home outright by age 62 can be challenging.
Since the big goal for retirement is to eliminate as many expenses as possible, erasing
a monthly housing payment is optimal. Having a long-term financial plan, including what
homeownership looks like in retirement, is extremely important. Renters who plan on
staying in the same general area for years to come should consider buying.
1. Benefit of eliminating monthly payments:
The twin bridesmaids of finances are income and expenses. When people retire, the money
coming in usually shrinks, which means so should the money going out. A mortgage payment
is one expense soon-to-be retirees should try to get rid of. If you can be mortgage-free by the
time you reach retirement, you'll be in a good position.
Mortgage-free retirees can save hundreds or thousands of dollars each month. Even with
property insurance, and taxes, the cost of owning a home is often less than renting.
Not only can retirees save on their housing costs; they can also make money on their homes.
Retirees who travel can earn money while they're on vacation through sites like Airbnb.
Another option to get extra cash flow is to rent a room. Downsizing can also save you money.
Going from a large family home to a cozy condo or smaller house can reduce utility costs as
well as allow you to cash out some equity in your home to fatten your nest egg. For people
not ready to sell, there are other options that allow you to tap the equity while keeping the house.
2. Benefit of having access to home equity, if needed.
There are several ways homeowners can tap the equity in their home without putting up
a for-sale sign; two of the most common ways are a cash-out refinance and a home
equity line of credit, or HELOC.
Equity-rich homeowners who want to lower their mortgage interest rate might consider
a cash-out refinance.
A cash-out refinance is almost like selling your house to yourself. The bank would cut you
a check for the equity, which is the difference between what you owe on the house and
the market value. If your home is worth $200,000 and you owe $100,000, then you have
$100,000 of equity in the home.
Banks usually limit the amount you get to 80 percent of the total equity. That means with
$100,000 in equity, the bank might give you $80,000. The amount you qualify for is usually
based on income, credit score and other determining factors.
Now comes the tricky part: When you do a cash-out refinance, you'll get a new mortgage.
If your interest rate is high because of poor credit or market conditions and you think you
have a chance of getting a lower interest rate with a new mortgage, then a cash-out refinance
might be an appealing way to access your equity; however, if your mortgage interest rate
increases with a new mortgage, then you should consider other options, such as a HELOC.
Something else to keep in mind is the fact that a new mortgage usually means going back
to square one if you choose a longer term. If your house is a few years away from being
paid off, restarting the clock is probably not a good financial move.
3. Even with a mortgage, there are liquidity options.
For people who want to keep their homes and existing mortgages while tapping their
home equity, one alternative is a HELOC.
The benefits of HELOCs are that you only pay on what you use and the interest is tax-deductible
if you use it to repair or upgrade your home. For retirees who want to retrofit their homes to
make life easier, such as installing stair lifts, grab bars and handrails, a HELOC could be a good
way to fund those upgrades and get a tax break. It is important to remember that once you use
that equity, it will likely take years and even decades to rebuild it.
The dual benefits of lowering your living expenses and having access to cash in emergencies
are great reasons to sail into retirement without a home loan springing a leak in your budget.
For more information go to https://homesalesneworleans.gardnerrealtors.com/