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5 Ways to Use Your Home Equity to Fund Retirement

Learn how you can turn home equity into retirement income with these different methods to use a home as a funding source.

There’s no denying it:

A home can be a valuable asset.

In retirement, home equity is also a powerful financial tool for retirement.

After saving for retirement for 20, 30, or 40 years, your home’s equity can supplement what you have and better secure your future. 

So whether you’re already retired or it’s right around the corner, here’s a look at several ways to use your home equity to fund retirement.

1. Cash Out By Selling Outright

Numerous options are available to you after retiring.

Some people remain in their current home, but others choose to sell and move to another property

For those looking to be closer to family, they might relocate and move in with their adult children and grandchildren. 

Selling your house and moving in with someone frees up cash tied in your home, which can supplement your retirement income.

The downside:

You’re giving up some of your personal space and privacy.

But selling doesn’t mean that you have to move in with someone.

  • Take your equity and move into something newer or your dream home.
  • Or, sell and put the equity toward purchasing a primary/investment property.

For example, you might consider buying a duplex. You could live in one unit and rent out the other unit. This is an excellent way to stretch your retirement dollars. 

The rent you receive on the second unit might be enough to cover the mortgage on the entire property, or at least half the mortgage.

This minimizes your monthly expenses, allowing you to stretch your retirement dollars. 

2. Downsize 

Another way to put your home equity to good use after retiring is downsizing, especially if you have a larger home and more space than you need.

With the children out of the house, you and your partner may only go into a few rooms, with the other rooms remaining empty or unused most of the time. 

As far as downsizing, you have many options.

The benefits of downsizing are straighforward.

There’s less space to maintain, and a smaller space is typically less expensive.

Your mortgage or rent might be cheaper than what you’re currently paying.

Plus, you’ll save money on utilities and property taxes.

And depending on how much equity you have when selling your house, you might be able to pay cash for a smaller space. You can enjoy mortgage-free living, while still having money left to supplement your retirement income.

The downside:

You’re moving into a smaller space.

So you’ll likely have to purge a lot of your personal belongings. Some of your furniture might not fit in your new home. 

And if you live in an area with a high cost-of-living, downsizing in your current city or state might not be financially beneficial.

You may have to move to another part of the country where it’s cheaper to live.

3. Purchase an Investment Property

Then again, maybe you want to stay put and purchase an investment property. This can also improve cash flow and supplement your income. 

If you don’t want to use personal savings to finance investment properties, maybe pull cash from your home.

One option is to refinance your home mortgage loan and tap your home equity

Refinancing is the process of getting a new mortgage to replace an existing mortgage. It’s an excellent way to reduce your mortgage interest rate. And with a cash-out refinance, you can borrow up to 80 percent of your home’s equity.

The downside:

You might not qualify for a lower interest rate. Also, you’ll have to pay closing costs again.

Refinancing can even extend the life of your mortgage. Many lenders don’t allow mortgage terms less than 15 years.

Alternative: HELOC or home equity loan

With that being said, consider getting a home equity line of credit (HELOC) or a home equity loan (lump sum).

Both options also allow you to borrow up to 80 percent of your home’s equity. Closing costs with both can be cheaper, and you can get a repayment term as low as five years.

Use this money to pay your down payment and closing costs on a rental property purchase. Or put it toward improving the space. 

If you buy a property at a good price, an investment property can be a lucrative income stream.

More so if you find a long-term renter, or if you use the property as a vacation rental and it stays booked the majority of the year. 

But since you’re borrowing equity from your primary residence to purchase an investment property, your primary mortgage payment will likely increase.

And if your home was paid off, this means that you’ll have a new mortgage on your primary property.

Now:

Before going this route, consider the pros and cons of being a landlord.

For example, there might be times when your property is empty, such as in between tenants. In which case, you’ll need to make the mortgage payment out of your own pocket. 

Also, you have to maintain and upkeep investment properties. This can involve major improvements and minor cosmetic repairs for as long as you own the home.

4. Rent Out Space In Your Home

Another option is to continue living in your home, and rent out space in the property. 

This might work if you have a basement apartment or maybe a room over the garage with its own separate entrance, bathroom, and kitchen. 

Why it's a great idea:

You earn rental income without having to purchase a separate property.

If you have a low mortgage, what you charge your renter might be enough to cover half or a third of your payment. 

This can help reduce your monthly expenses allowing your retirement dollars to stretch further.

And if you’ve paid off the property, the rental income can increase your nest egg.

The downside:

You might have to prepare the space for a renter.

This can involve spending money on renovations or cosmetic updates. Or you might have to construct a separate entrance or a bathroom. 

Plus, you’ll continuously put work into the property. When renters move out, you might have repaint, make repairs, or replace the carpet.

5. Get a Reverse Mortgage

Another way to put your home’s equity to good use in retirement is to get a reverse mortgage

If you’re age 62 and older and own your home outright— or how substantial equity—you might be eligible to borrow against your home’s equity.

And the best part:

You don’t have to repay this money until you move, die, or vacate the home for other reasons. 

But although you don’t make monthly payments on a reverse mortgage, you’re still responsible for the home’s insurance and property taxes. 

If you move or vacate the property, proceeds from the sale are used to pay off the reverse mortgage, and then you get to keep the rest.

Similarly, when you die your heirs receive whatever is left after paying off the reverse mortgage balance.

Use proceeds from a reverse mortgage to pay for healthcare expenses, debt repayment, or everyday living expenses. It can also increase your personal savings, or use the money for home repairs. 

In addition, getting a reverse mortgage doesn’t affect any Social Security or Medicare benefits you receive.

As a bonus, money you receive from a reverse mortgage is tax-free.

The downside:

Reverse mortgages can have high fees and closing costs.

So make sure you understand the costs associated with this type of mortgage before applying.

Final Word

Your home’s equity can be a valuable tool in retirement, supplementing your income and boosting your nest egg. 

With so many available options for home equity, seriously consider the lifestyle you want to have in retirement.

Calculate what you’re likely to receive in retirement income each year, and how much extra income you want to bring in.

This can help you determine whether to stay put in your current home, sell your house outright, or purchase an investment property.