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3: Analyze Your Decisions

How to Use Your Home's Equity

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Owning your home allows you to take advantage of specialized tax deductions (especially for mortgage interest and property taxes) and gives you peace of mind that you have a place to live. Since there are often no new sources of income during retirement, some retirees will consider using their home’s equity to help pay for their lifestyle. This can be accomplished through:

  • Taking home equity loans or lines of credit
  • Taking a reverse mortgage

But all of these options mean taking out debt, which can reduce your income stream and add to your debt load. For this reason, leveraging your home equity should be considered as one of your last options.

Home Equity Loans and Lines of Credit

How home equity loans differ from lines of credit:

  • A home equity loan provides you a one-time payment at a fixed rate with a fixed payment term and monthly payment.
  • A line of credit provides you an amount that can be borrowed either all at once or over time. Payments begin when you borrow against the line, and the interest rate may vary with the timing of the draw.

Home equity loans and lines of credit usually are less expensive than reverse mortgages with respect to upfront costs. But, lenders use your income level and credit score to make these lending decisions. If you live on a fixed income in retirement, qualifying can be problematic, and you may not be able to get as much as you can through a reverse mortgage.

money coming out of a houseReverse Mortgages

A reverse mortgage is what it says — the reverse of a traditional mortgage. Instead of you paying your mortgage lender money and gaining equity in your home, your reverse mortgage lender pays you, taking equity out of your home. Over time, your equity decreases and your debt increases.

So why would anyone do this?

  • Reverse mortgages allow you to remain in your home.
  • You make no payments to the lender. When you die or sell your home, proceeds from the sale of your home are paid to the reverse mortgage lender.
  • Payments from a reverse mortgage are free from federal and state income tax and can be used for any purpose.
  • The interest that eventually will be paid when the reverse mortgage is paid off may be tax-deductible.
  • Reverse mortgages provide you income. Payments can be made to you as a lump sum, as a line of credit that you can draw on when needed, as monthly income for your life, or as a combination.
  • Using a reverse mortgage can help you delay taking Social Security benefits until you reach full retirement age.

Should You Use a Reverse Mortgage?

If you plan to live in your home until you pass away, a reverse mortgage may make sense. If you are at least 62, in good health and have a long life expectancy, a reverse mortgage can provide you significant retirement income.

Your age and the value of your home will affect the amount you can receive in a reverse mortgage. The older you are or the more value your home has, the more you can borrow. An average amount for a reverse mortgage is about 50 percent of your home’s value.

Reverse mortgages often carry high upfront costs. In addition, if you are early in retirement or wish to leave the house to heirs, reverse mortgages may not be the best option to generate additional income for living expenses. They need to be evaluated carefully with the help of a professional financial advisor.

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