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Retirement income can flow from a variety of sources. That includes retirement accounts, investments, Social Security benefits, annuities, permanent life insurance and personal savings. If you need a little extra to supplement your retirement savings, however, using your home equity to fill in the gaps may be an option.
A common rule of thumb is to have at least 10 times your current salary saved by age 67. If you're going into retirement below that target, you're not alone. About 70% of current retirees wish they'd saved more and planned earlier for retirement, according to the Employee Benefit Research Institute.
Home equity is one more resource that could help bolster your cash flow in retirement. Below are some different ways to convert home equity into retirement income.
Get a Cash-Out Refinance
A mortgage refinance involves taking out a new home loan and using that to absorb your outstanding mortgage balance. The process is similar to taking out a mortgage when buying a home. Your credit, income, debts and assets will all factor into the interest rate you get on your new loan. A cash-out refinance works in much the same way, except the new mortgage is larger than the balance on the old one. You can use those excess funds for all kinds of things, including retirement income.
You'll likely need significant home equity to qualify for this type of refinance loan. Lenders generally allow you to borrow up to 80% of your property's value. That includes the original loan balance plus the cash overflow you're hoping to get. Let's say your home is worth $375,000 and you have $200,000 left on your mortgage. If you qualify, you might get up to $100,000 in cash. Your new loan balance would then be $300,000.
A cash-out refinance loan could provide quick access to retirement income, but there are some drawbacks:
- Your loan balance will increase.
- Your monthly payment will likely go up.
- Closing costs typically range anywhere from 2% to 6%.
- You'll need to go through the mortgage application process. Your home equity, credit and debt-to-income ratio will all factor into your approval and interest rate.
- Your home could go into foreclosure if you default.
If you're concerned about your ability to keep up with your new mortgage payment, a cash-out refinance might not be your best bet. It's also not a great option during periods of high interest rates, as the rate on your new mortgage may be much higher than it was before.
Sell Your Home and Buy Something Less Expensive
Downsizing is another option. Selling your home and moving to a less expensive property could provide a lump sum of cash to pad your nest egg. A number of factors will determine your home's value. That includes:
- Prices of comparable properties in your area: What are similar homes selling for? Real estate comps can help you estimate your home's value.
- Your neighborhood: Your home's proximity to schools, jobs, public transportation, shopping and entertainment can attract or deter potential buyers. The same goes for the crime rate and the quality of local schools.
- The age and condition of your home: If your home is outdated or in need of major repairs, that could drag down its value. Larger homes may also fetch higher prices than smaller ones. The desire for a larger space is one of the top reasons people buy new homes, according to data from the National Association of Realtors.
- The housing market: The typical home value in the U.S. has increased nearly 43% since 2020, according to Zillow data from January 2023, but the housing market is constantly in flux. This will influence how much you sell your home for and the cost of purchasing a new home.
When Downsizing Makes Sense
- Your home has gone up in value.
- You've got significant equity and, in turn, can keep more of the profit.
- You've found a new home you like that's more affordable.
When Not to Downsize
- Closing costs and real estate agent fees will take a big bite of your profits.
- Buying a new home won't lower your monthly payment or provide significant cash for retirement.
Get a Reverse Mortgage
A reverse mortgage is a home loan that allows retirees to trade home equity for cash. The home is used as collateral, which means you won't need to move or sell the property. It can provide upfront cash, fixed monthly payments or a credit line that you can draw on as needed. It's similar to a home equity loan or line of credit, but with one major difference: You don't have to repay it. Instead, the lender is repaid from outstanding equity later on. This can happen when the homeowner:
- Passes away
- Becomes delinquent on property taxes, homeowners association fees or insurance
- Fails to keep the home in good condition
Reverse mortgages are usually available to homeowners who are at least 62 years old and have substantial home equity.
There are several types of reverse mortgages. The most common is called a home equity conversion mortgage, which is insured by the Federal Housing Administration. In 2023, these are capped at $1,089,300.
That can go a long way in retirement, but there are some serious caveats. You'll need to cover application fees, home appraisal costs and closing costs. You'll also need to continue making good on your primary mortgage payments. If the home falls into disrepair or no longer serves as your primary residence, you could lose your home. What's more, your heirs will either have to pay off or refinance the reverse mortgage if they want to keep the property.
Other Ways to Supplement Your Retirement Savings
If you lack home equity or aren't comfortable borrowing against it, there are other ways to supplement your retirement income. That might include:
- Delaying Social Security: You can begin collecting Social Security at age 62, but your benefit will be larger if you delay it until at least your full retirement age. That's 67 for those born after 1959. Waiting could increase your benefit by as much as 30%.
- Picking up a part-time job: That may be retail work at a local store or consulting within your former industry. Working a few hours a week can help boost your income and keep you active in the community.
- Continuing to invest: A well-allocated investment portfolio can cover income gaps during retirement. That doesn't mean you have to assume a ton of risk, but maintaining some exposure could help you keep up with inflation when you're no longer working. A financial professional can provide personalized guidance here.
The Bottom Line
If you're looking for ways to round out your retirement income, your home equity could be a viable option. A cash-out refinance loan or reverse mortgage are two ways to go about it. Just remember that you could lose your home if you're unable to hold up your end of the agreement. Downsizing to a less expensive home is another option, assuming the numbers work out in your favor.
Cash flow is a key part of living the life you want in retirement. Maintaining strong credit is just as important. Retirees may be susceptible to identity theft scams that target seniors. Free credit monitoring with Experian is a simple way to safeguard your credit at any age.