House-Rich, Cash-Strapped: Advice for Older Homeowners

For many homeowners of retirement age, much of their net worth is tied up in their home equity, their home value minus any remaining liens. Home equity makes up 47% of the net worth of a median white homeowner age 62 or older, 81% of total net worth for older Black homeowners and 89% of total net worth for older Latino homeowners, according to the Urban Institute.

If you’re looking for ways to cover expenses after retirement, you may consider converting some of your home equity into cash. “There is no universally ‘best’ source of cash flow in retirement,” says Andy Panko, owner of Tenon Financial in Metuchen, New Jersey, and a retirement income certified professional. But those who hesitate to draw from their home’s well of equity “may be depriving themselves of a great source of cash flow during their retirement years.”

It’s important to think through what you hope to leave behind, if anything. If your goal is to leave your home as a legacy, “you should generally try to avoid having any form of mortgage against the property outstanding when you die” says Panko. However, if this isn’t your main priority, “it could make sense to ‘unlock’ the equity in your home and use it during your lifetime via some form of mortgage.”

Options include a home equity line of credit, home equity loan, reverse mortgage or home equity investment. The right loan product for you depends on your reason for needing the cash, says Anneliese Lederer, senior policy counsel for the Center for Responsible Lending in Washington, D.C.

Here’s what to consider if you’re thinking about accessing your equity.

HELOCs: for qualified borrowers who want flexibility

If you need cash to finance a multistep project — for example, making some upgrades to your home to improve accessibility — the first option to consider is a home equity line of credit, or HELOC.

A HELOC is a flexible line of credit that you can borrow from as needed, up to a certain limit. You typically have 10 years to draw from the line, during which time you’re only required to make payments on the interest.

After 10 years, you can’t draw any more, and payments will include both principal and interest. HELOC interest rates are usually variable, meaning they move up and down with a banking base rate known as the prime rate.

If you’re retired, you may be required to show alternative income documentation to lenders to qualify for a HELOC. This includes any pension income, Social Security income or disbursements from retirement accounts. Just like any applicant, you’ll have to prove that you can keep up with monthly payments.

If you can’t make your monthly payments, you risk losing your home to foreclosure.

Home equity loans: for qualified borrowers who need a lump sum

If you need to liquidate some of your equity to finance a one-off expense, such as replacing your roof, you may consider a home equity loan.

This is a fixed-rate second mortgage that delivers the money all at once.

As with a HELOC, you’ll have to document your ability to pay before a lender will consider granting you the loan, and a home equity loan can lead to foreclosure if you can’t keep up with monthly payments.

Since the home equity loan has a fixed rate, payments are more predictable than a HELOC with a variable rate.

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Transferring a home with a home equity loan or HELOC

There may be implications for your heirs if you can’t pay off a HELOC or home equity loan within your lifetime.

U.S. law prevents lenders from enforcing a due-on-sale provision (in which the loan needs to be paid off in a lump sum after your death) if your inheritors are relatives or a spouse. These “protected” family members could continue making monthly payments on a remaining loan balance. If you intend to leave the home to someone who doesn’t qualify under the U.S. code, you may consider putting them on the loan when you apply to allow for a seamless transfer.

Consult an estate planner for advice specific to your needs and goals. Monique D. Hayes, founder and CEO of Estates Made Easy in Miami, Florida, points out, for instance, that putting a home into a trust may be a bad fit for someone exploring home equity options.

Reverse mortgages: for borrowers 62+ who are struggling with bills

If you need a more permanent financial change that will allow you to stay in your home, you may find that a reverse mortgage is a good fit.

This loan, also known as a home equity conversion mortgage, or HECM, is backed by the Federal Housing Authority (FHA) and is not required to be paid back until you move or die, when payment becomes the responsibility of your heirs. If you’re expecting to use your equity to help your family build generational wealth, “that’s a big negative of reverse mortgages,” Lederer says, because your heirs will need to sell the property or pay back the loan.

You must be at least 62 years old to qualify for a reverse mortgage, and you are required to meet with a housing counselor before pursuing this option. These counselors provide advice to homeowners for free or at a low cost. You can find a counselor in your area using this portal from the Consumer Financial Protection Bureau. The counselor will look at your goals, financial shortfall and income history to clarify whether a reverse mortgage is an appropriate choice, says Lederer.

Reverse mortgages don’t have income requirements, though they do require that borrowers can pay their obligations such as property taxes and homeowners insurance. Panko says, “A reverse mortgage can be a great solution to someone who’s house-rich and otherwise income not-so-rich.”

Home equity investments: for borrowers who can’t qualify for a mainstream loan

If you can’t qualify for other options and need a solution with more flexible application requirements, you may be interested in a home equity investment or sharing agreement. Traditional lenders don’t offer these — instead, they’re a niche product primarily provided by companies that specialize in these transactions and usually have much lower credit requirements than HELOCs and home equity loans. Some major names that you may see in your research include Point, Unison and Hometap.

A home equity investment allows you to access some of your home’s equity as a lump sum in exchange for giving the company a percentage of your home’s appreciation. Unlike typical loans that require monthly payments, these have one balloon payment that comes due after 10 to 30 years (or when you decide to move), when you’ll have to either sell the home or pay the investment company’s share out of pocket. The amount of this balloon payment is a percentage of the appreciation of your home from the time that you entered the agreement, though these companies will often lower your home’s initial valuation to inflate the amount of appreciation they’re entitled to receive.

You may end up paying out much more than you received. For example, Point outlines that you could owe more than double your initial cash advance in just 10 years if your home appreciates at a relatively low rate of 1.5% per year. The more your home appreciates, the more you’ll owe in the end.

There is no one-size-fits-all approach to overcoming a financial shortfall with your home equity. Weighing your options and speaking with a housing counselor can help you determine the best course of action for your situation, and in the process, can illuminate your goals for your property during your lifetime and beyond.

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