Home Sweet Home Equity
Buying a home is a long-term commitment, so it’s not surprising that older Americans are much more likely than younger people to own their homes “free and clear” (see chart). If you have paid off your mortgage or anticipate doing so by the time you retire, congratulations! Owning your home outright can help provide financial flexibility and stability during your retirement years.
Paying Off the Mortgage
The percentage of homeowners with a primary regular mortgage declines steadily with age.
Even if you still make mortgage payments, the equity in your home is a valuable asset. And current low interest rates might give you an opportunity to pay off your home more quickly. Here are some ideas to consider.
Enjoy Lower Expenses
If you are happy with your home and don’t need to tap the equity, living free of a monthly mortgage could make a big difference in stretching your retirement dollars. It’s almost as if you had saved enough extra to provide a monthly income equal to your mortgage. You still have to pay property taxes and homeowners insurance, but these expenses are typically smaller than a mortgage payment.
If you sell your home and purchase another one outright with cash to spare, the additional funds could boost your savings and provide additional income. On the other hand, if you take out a new mortgage, you may set yourself back financially. Keep in mind that condominiums, retirement communities, and other planned communities typically have monthly homeowners association dues. On the plus side, these dues generally pay for maintenance services and amenities that could make your retirement more enjoyable.
Borrow on Equity
If you stay in your home and want money for a specific purpose, such as remodeling the kitchen or fixing the roof, you might take out a home-equity loan. If instead you’ll need to access funds over several years, such as to pay for college or medical expenses, you may prefer a home-equity line of credit (HELOC). Home-equity financing typically has favorable interest rates because your home secures the loan. However, you are taking on another monthly payment, and the lender can foreclose on your home if you fail to repay the loan. In addition, you may have to pay closing costs and other fees to obtain the loan. Interest on home-equity loans and HELOCs is typically tax deductible if the proceeds are used to buy, build, or substantially improve your main home, but is not tax deductible if the proceeds are used for other expenses.
With mortgage rates near historic lows, you might consider refinancing your home at a lower interest rate. Refinancing may allow you to take some of the equity out as part of the loan, but of course that increases the amount you borrow. While a refi loan may have a lower interest rate than a home-equity loan or HELOC, it might have higher costs that could take some time to recoup. And a new loan comes with a new amortization schedule, so even with lower rates, a larger portion of your payment may be applied to interest in the early years of the loan. Refinancing might be a wise move if the lower rate enables you to pay off a new mortgage faster than your current mortgage.
Shift into Reverse
If you are 62 or older and want to borrow against the equity in your home without making monthly payments, you might consider a reverse mortgage, which provides payments to you as an advance on your home equity. To qualify, you must own the property outright or have a small mortgage balance. You don’t have to pay back a reverse mortgage as long as you continue living in the home. However, interest accumulates, and the loan must be repaid after you stop living in the home as a principal residence, so you or your heirs may eventually be forced to sell the home, risking exposure to the uncertainties of the housing market.
There are three types of reverse mortgages.
Single-purpose reverse mortgage — Offered by some state and local government agencies and nonprofit organizations; typically the least expensive option but can be used only for one purpose specified by the lender, such as home repairs or property taxes.
Proprietary reverse mortgage — Offered by private companies; may provide a larger loan if you have a more expensive home.
Home Equity Conversion Mortgage (HECM) — Federally insured and backed by the U.S. Department of Housing and Urban Development; can be used for any purpose and allows you to choose from various payment options.
As with any type of loan, it’s important to understand and compare the costs and other features of a reverse mortgage. Fees may be substantial, and some reverse mortgages require mortgage insurance premiums. Interest rates are typically variable and may change over the course of the loan, and interest is not tax deductible until the loan is paid off in part or in full.