Do you know how to use home equity (HE) in your best interest? Here’s what experts recommend you do!
With scary housing market conditions, persistent inflation, and high interest rates, home equity products have become one of the most popular and viable financing methods recently. For years, as we all know, home prices have tended to get higher and higher, a trend that accelerated dramatically in the last decade. This has left a surprising number of homeowners, especially those who have owned their property for a long time, sitting on a substantial amount of equity that is ready to be tapped into for various financial needs and goals.
Besides that, experts say that interest rates on other forms of debt, particularly credit cards, went south, with the average rate soaring above 21%—it’s pretty crazy if you think about it. This is because credit cards represent unsecured debt, meaning there is no collateral for the lender to seize if you default, leading to much higher risk and, consequently, higher interest rates. Speaking of that, home equity products are far cheaper as financing options because they are secured by your property. They usually have significantly lower rates than personal loans or credit cards, with home equity loans, for example, now having rates averaging between 8% and 10%. This difference can translate into thousands of dollars in savings over the life of the loan.
If you take a closer look, you’ll notice that this method is particularly helpful for seniors because they can quickly see the benefits of leveraging an asset they’ve spent decades building. It can substantially bolster your retirement income, providing a much-needed financial cushion. But it can also be used for several specific, life-enhancing purposes, such as making your house more accessible for aging in place, paying off high-interest medical debts, consolidating other burdensome loans, or even assisting your grandkids through college or with a down payment on their first home. If you want to make the most out of this valuable asset, here’s what experts recommend you do:
1. Loans and HELOCs
Home equity loans—a type of second mortgage—are a great way seniors can borrow from their HE. These methods provide a one-time, lump-sum payment at closing and require regular fixed monthly payments of both principal and interest right from the beginning of the loan. This makes them an excellent choice for seniors who are lucky to have a reliable, steady income and need a specific, known amount of money for a single large expense. For instance, this could be perfect for a major kitchen remodel, the purchase of a new vehicle, or the consolidation of several high-interest debts into one manageable payment. The predictability of the fixed rate and payment offers peace of mind and simplifies budgeting.
HELOCs (home equity lines of credit) are another versatile option for older Americans, as professionals say. Thanks to this, your equity is turned into a revolving credit line that you can withdraw money from as needed, usually for a “draw period” of 10 years. Experts say it’s a revolving line of credit, which means that as you repay the principal, that amount becomes available for you to borrow again. You can withdraw funds, make payments, and then use the funds again throughout the draw period. Think of it like a credit card, but with a much lower interest rate, and don’t forget that the collateral is your home, which makes it a very serious financial commitment.
HELOCs can be a great option when you are unsure about the total amount you’ll need or if you require long-term, flexible access to funds, such as for ongoing medical expenses or a series of home accessibility improvements over several years. A key feature is that HELOC rates are often variable, tied to the prime rate, meaning your payments could change over time. Moreover, if you have a fixed income, they usually only ask for interest-only payments during the initial 10-year draw period of the loan. In my opinion, this is a good way to keep initial payments low and ease your immediate financial burden, but it’s crucial to remember that a repayment period will follow where you must pay back both principal and interest.
2. Reverse mortgage
Another fantastic way for older citizens (typically age 62 and older) to tap their home equity is with the help of a reverse mortgage, specifically the federally-insured Home Equity Conversion Mortgage (HECM). Thanks to these unique loans, you won’t have to make monthly mortgage payments but instead get paid (out of your HE) by your lender. You have several options for receiving the funds: you can opt for a steady monthly payment to supplement your income, a single lump sum for a major expense, or a line of credit you can use in case of emergencies or as needed. This flexibility allows you to tailor the loan to your specific financial situation.
With this method, the homeowner remains on the title and can continue living in the home, but they don’t need to make a mortgage payment anymore. It is critical to understand, however, that you are still responsible for paying property taxes, homeowner’s insurance, and basic maintenance to keep the home in good condition. Thanks to the elimination of the monthly mortgage payment, their funds are freed up, so they can do everything they want or need as they get ready for their beautiful golden years, providing significant relief to their cash flow.
Similar to other loans, reverse mortgages have interest charges and mortgage insurance premiums that accrue over time, but neither the interest nor the borrowed amount becomes due until a maturity event occurs. This typically happens when you sell the property, move out permanently for more than 12 consecutive months, or pass away. At that point, the loan balance must be repaid, which is usually accomplished by selling the home.
While this might sound like a wonderful method, it comes with a few cons as well that demand careful consideration. The biggest one is that you leave the younger members of your family (the heirs) with a big loan to deal with after you’re gone. They will have a set period, usually up to six months with possible extensions up to a year, to decide whether they want to pay it off (and keep the home), refinance, or sell the property to satisfy the loan. Fortunately, HECMs are “non-recourse” loans, meaning your heirs will never owe more than the home’s appraised value. If you’re on the fence regarding a reverse mortgage, it might be worth talking to your potential heirs and a federally-approved HECM counselor to find a solution together.
3. Home equity investments
Another innovative method for seniors to make the most out of their home equity is to consider HE investments, also known as home equity sharing agreements. This financial tool will enable you to exchange a portion of your home’s future value for a lump sum of cash today. The key difference from a loan is that there is no debt created; you won’t have to deal with monthly payments or accruing interest. Instead, the company is making an investment in your property. You’ll need to pay the investor back their initial amount plus a share of the home’s appreciation once you sell the property or reach the end of your term. According to experts, this can be anywhere between 10 and 30 years, giving you a long time horizon.
Experts suggest that this approach enables homeowners to live in their homes as they normally would and retain complete control over their properties, including the right to renovate or redecorate. This can be an excellent option for those who may not qualify for a traditional loan due to their credit score or income level. Various companies provide home equity investments, such as Hometap, Unison, Splitero, Unlock, and Point. It’s worth exploring these options to find the most suitable one for you, as their terms, fees, and the percentage of appreciation they take can vary significantly. Be sure to read all the fine print and understand exactly how the final payout will be calculated.
4. Downsize to unlock equity
For many, the most straightforward path is simply to sell your home and move to a smaller, equally cozy, and beautiful one with more affordable property tax and upkeep. This can free up a big part of your HE in one go. Downsizing, for instance, can drastically lower your recurring living costs, including utilities, insurance, and property taxes, while leaving you with a substantial amount of extra financial resources. This newly unlocked capital can then be used to strengthen your retirement fund, invest for future income, or simply enjoy a more comfortable and less stressful lifestyle.
According to experts, you should consider a few things before you sell and make such a significant life change. First of all, you should meticulously calculate all the costs associated with moving and purchasing a new property. This includes realtor commissions on the sale, closing costs, moving company fees, and potential repairs or staging needed to get your current home market-ready. Also, don’t forget about the potential tax implications to make sure this strategy makes financial sense. For many, capital gains tax on the sale of a primary residence can be largely avoided thanks to a generous exclusion ($250,000 for single filers, $500,000 for married couples), but it’s essential to confirm your eligibility with a tax professional.
…Would you consider downsizing to save more money and simplify your life in retirement? Let us know in the comments below!
There’s something you should avoid…
In today’s high-rate environment, experts strongly advise against using a cash-out refinance to access home equity, despite its apparent benefits in the past. Given that refinancing involves completely replacing your main mortgage with a new, larger loan that has different terms and a new rate, doing something like this today will result in a big increase in interest rates and monthly payments for the vast majority of homeowners. You would not only be borrowing the cash-out portion at a high rate but also refinancing your entire existing mortgage balance at that same high rate.
According to real estate agencies, roughly 92% of homeowners currently have a mortgage rate under 6%, with a significant number enjoying rates closer to 3%. For older citizens in this group, refinancing would entail giving up that fantastic low rate and obtaining a new loan at the current, much higher rates. For example, replacing a $200,000 mortgage at 3.5% with a new $250,000 loan at 7% would cause your monthly payment to jump dramatically, erasing any benefit from the cash received.
When interest rates were extremely low a few years ago, cash-out refinances were fairly common and often made good financial sense; however, given the current rates, they’re not the best choice for most people. A home equity loan or HELOC is almost always a better alternative as it allows you to keep your low-rate primary mortgage intact. But again, what works for some people might not work for you, which is why we always advise people to seek professional help from a qualified, independent financial advisor and only consider our topic a guideline.
Takeaway
Whatever type of home equity product you decide to go for, don’t forget that shopping around could help you get the best rate and terms available. Your home is likely your largest asset, so this decision deserves careful research. Take your time to check out different companies and options—including national banks, local credit unions, and online lenders—and compare each on their Annual Percentage Rate (APR), terms, fees, potential prepayment penalties, and other important details. Don’t just look at the advertised interest rate; the APR gives a more complete picture of the loan’s cost.
In case the rate you’re quoted seems incredibly high, you can take a few steps back to improve your credit score and then reapply once you reach your goal. Simple actions like consistently paying all bills on time, paying down credit card balances to lower your credit utilization ratio, and checking your credit reports for any errors can make a significant difference. As experts say, borrowers who have higher credit scores will generally receive the best rates, so a little effort here can save you a lot of money. Don’t rush, consider every single detail, decide with your spouse and family members what to do, and don’t feel pressured by any company! You get to decide what’s best for your finances!
Do you know any other tips on how seniors can make the most of their home equity products? Your experience could help others in the community! Let us know in the comments below because we’re always looking for easy and effective ways to improve our lives and finances. The key is to treat the equity in your home with the respect it deserves, making informed choices that align with your long-term goals. If you need more info regarding this topic, here’s a useful book for you. With that being said, we wish you a happy day filled with smart financial choices! Other than that, here’s another great article for you to check out: Top 11 Things to Never Pay Full Price For
