3 Ways Your House Can Help Your Retirement
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It would be nice if everyone's life in retirement was fully funded by Social Security benefits and the income from their 401(k) or IRA. Unfortunately, those funds aren't always enough to cover everything a retiree needs. As a last resort, you can turn to what's almost certainly your biggest asset: your home.
1. A home equity line of credit (HELOC)
If you have substantial equity available in your house, the least extreme way of benefiting from that equity is to get a HELOC or conventional home loan and use those funds to pay for expenses. The difference between a home loan and a line of credit is that a home loan drops a wad of cash in your lap but requires you to make fixed payments over a fixed period of time, while a line of credit works more like a giant credit card: you draw the money as needed and then pay it back at a variable rate of interest. So unless you need a specific amount of cash for something, a HELOC will probably be more useful than a home loan.
The good news about a HELOC is that the interest rate is far lower than a standard credit card's, since the HELOC is secured by your house. The bad news is that if you get in over your head and can't keep up your payments, you could lose your house. A HELOC can be helpful in smoothing over cash flow issues; if your expenses come in faster than your income, you can use the HELOC to pay for your expenses, then pay off the HELOC balance once your next check comes in.
For example, let's say that you normally get by on Social Security benefits and a withdrawal from your IRA, but in the last few months the market has tanked and dragged the investments in your IRA down with it. Taking your usual withdrawal would impinge too heavily on your capital, so you take a smaller withdrawal and make up the difference with your HELOC. A few months later, when the market rebounds and your investments are back on track, you can pay off the money you borrowed from the HELOC with another small withdrawal from your IRA. Using this system you can glide through any brief market downturns without harm, and the much lower interest rate on a HELOC versus a credit card allows you to do so with a minimum of cost. This isn't by any means an ideal solution, but in a tough situation a HELOC can help.
2. A reverse mortgage
If you're 62 or older, a reverse mortgage may make more sense than a conventional HELOC. A reverse mortgage is a loan that uses your house as collateral, but unlike a conventional loan, you don't need to ever pay back the loan (unless you decide to move or sell your house).
In a sense, a reverse mortgage is like selling part or all of your house to the bank, while the bank lets you keep living in it and pays you for it in installments. Because this is a loan, it doesn't count as income for tax purposes -- so it won't affect your eligibility for Medicaid or raise your Medicare premiums. You can choose to receive payments either for the rest of your life or for a set period of time, depending on your needs. Naturally, a payments-for-life structure will result in smaller monthly payments than if you opt for a limited number.
3. Downsizing your living situation
Downsizing means selling your house and moving to a place where you'll have substantially lower housing expenses. Typically, smaller houses have lower utility bills, maintenance costs, and property taxes than bigger houses do -- so downsizing your house not only gives you extra funds in the short term, but also reduces your expenses in the long term. A smaller house can also be easier to keep up and move around in, especially if you move from a house with multiple stories to a house that's on a single floor.
When you downsize you can use part of the funds from selling your house to buy a smaller house, or you could cut your expenses even further by moving in with family, or even renting a room or apartment.
What's the best option for you?
If you love your current house and don't want to move, downsizing is obviously out. In that case, a reverse mortgage is probably your best bet. You can choose payments for life, and as long as at least one borrower is alive (which presumably would include you), you won't be forced to move out of the house or run out of payments.
On the other hand, a reverse mortgage means you won't be able to leave your house to your heirs; unless they can buy it back from the bank, it'll be resold to someone else. If it's important to you to be able to bequeath your house to a particular person or group, go with a conventional loan or HELOC instead of a reverse mortgage. And if your current house is more than you need or can comfortably handle, downsizing can help you financially and also make your life easier in other ways.
Whichever option you choose, this decision will have a major impact on you and your family, so it's important to consult with a legal advisor before you do anything. Your advisor may be able to suggest a funding option that won't require you to put your house on the line.
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