While Americans have a multitude of potential options and avenues they can use to fund their life after completing a career, many Americans — including current seniors — often find themselves unprepared for retirement. This is why it may be necessary to seek out less traditional sources of retirement funding, and one such potential source could be home equity. This is according to a new article published at financial news and information website the Motley Fool.
“Unfortunately, not everyone can qualify for the most common retirement income streams,” writes contributor Ryan Downie. “Even if you are eligible, it may not be enough to cover bills, pay for higher medical costs, keep up with inflation, or provide the desired lifestyle for your family. If you can’t meet your needs through the traditional channels, you might need to get creative.”
This is where the employment of someone’s home equity can come into play, up to and including the use of a financial product such as a reverse mortgage, Downie says.
“Real estate is the largest asset class for most retirees, according to U.S. census data. You may have a few hundred thousand dollars of equity in your house, but it’s unfortunately not liquid and available to pay for things,” he writes. “This problem was addressed by the development of reverse mortgages and other financial products, which transform home equity into cash while allowing someone to remain in their home.”
Still, while home equity does remain an option for someone seeking a retirement funding solution, that’s not to say that the choice doesn’t warrant serious, detailed consideration of all the potential effects, he writes.
“This sounds like a great deal at face value, but there are some risks and downsides that need to be considered. Reverse mortgages require the payment of fees and a rising embedded interest cost as the loan grows, and they don’t change the liability of bills such as property tax or insurance,” he says.
The possibility also exists for equity to be diminished over time depending on how a borrower may choose to use a loan’s proceeds or a line of credit.
“These products also necessarily deplete your assets by turning them into cash for consumption, so it will whittle down your net worth over time,” he says. “You must weigh the costs, risks, and benefits before you make a decision on a reverse mortgage.”
Home equity is not the only potentially unexpected source of retirement income, however. A senior can also look into less traditional options including peer-to-peer lending services which connect individual lenders to individual borrowers for private loans; private real estate investment trusts (REITs); or even a silent partnership in a small business, which — if successful — can create an additional income stream.
Read the article at the Motley Fool.