Kiplinger: Importance of Tapping Home Equity in Retirement Increasing

For seniors who are increasingly concerned about adequately funding their retirement, the increasing prevalence of options that can provide cash flow through the use of home equity should prove to be an encouraging development for many Americans at or near retirement. This is according to a new column published at Kiplinger Personal Finance.

“There are more ways than ever to turn your equity into a source of retirement income,” the column reads. “Outside of a plain-vanilla refinance, retirees can access their home equity through a cash-out refinance, a home equity line of credit or a reverse mortgage. Or you can downsize (more on that below) and use the proceeds to beef up your nest egg.”

The number of reverse mortgages originated is expected to rise this year, the column says, partially due to the increased interest that the COVID-19 coronavirus pandemic has generated in the product category. The financial stress faced by seniors because of the health crisis has naturally made some turn their heads to consider the employment of their home’s equity with this type of product. However, more stringent approval requirements and the effects it could have on a person’s finances should be closely absorbed before an ultimate decision is made.

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“You must own the property outright or have paid down a considerable amount of the mortgage,” the column reads. “You must also occupy the home as your primary residence. Lenders will review your income and credit history to ensure you can afford to stay in the home and keep it in good condition. They will also determine if your income is sufficient to cover property taxes, insurance and any other fees, such as closing costs and account-service fees. If the lender determines you can’t handle those costs, it will set aside funds from your payout in an escrow account and pay those bills for you, reducing the amount of the loan you have access to.”

Prior to any reverse mortgage decision, family and other trusted advisors should be consulted according to Keith Gumbinger, vice president of financial publisher HSH.

“No one wants to talk about their finances, but you are thinking about making changes that could affect your spouse or your kids in the future—especially in the case of taking out a reverse mortgage,” he explains to Kiplinger.

For a person who has access to the services of a financial advisor, Gumbinger recommends consulting them prior to making any decisions about what kind of home equity product to make use of in terms of retirement financing, the column says.

Other home equity tapping options that a senior can consider outside of a reverse mortgage includes a home equity line of credit (HELOC), a traditional mortgage refinance, or downsizing into a smaller home while investing the remaining cash into something with a potential for a return, the article explains.

Read the article at Kiplinger for details on some of the other presented options.

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