-Written by Robin Rosa MLO #1402813, Reverse Mortgage Specialist

Much damage has been done to the U.S. economy in the last two years causing retirees to reconsider how to use home equity. The COVID-19 pandemic coupled with shutdowns and central banks’ efforts to stimulate the economy has left the financial markets and world economies on the precipice of a deep recession. To make matters worse, seniors and retirees are getting pummeled by a one-two punch of inflation quickly approaching 10% and recent declines in stocks and bonds in an increasingly volatile market. As a result, older Americans are racking up consumer debt and are concerned about making ends meet as they age. It is time to reconsider how to use home equity as a tool to mitigate risk and create an additional stream of tax-free income in retirement.

On August 2^nd, 2022, the Federal Reserve Bank of New York issued a press release noting that mortgage balances increased as home purchase prices skyrocketed. But more concerning is the massive 13% cumulative increase in credit card debt – the largest increase in over 20 years. “The second quarter of 2022 showed robust increases in mortgage, auto loan, and credit card balances, driven in part by rising prices,” said Joelle Scaly, Administrator of the Center for Microeconomic Data at the New York Fed.

At the same time, however, the home equity held by seniors has appreciated significantly, which could be tempting to tap into to help make ends meet. However, when it comes to using equity in your home, there is no ‘one-size-fits-all’ solution. It is important to do your research and consult with a professional to determine the optimal method for you, as there are several ways to deploy your home equity to finance your retirement. These are some considerations that need to be made when retirees reconsider how to use home equity, to help determine the optimal home equity deployment strategy:

1.    Downsize, or as we at Northwest Reverse Mortgage call it, “right size” your lifestyle.

You might be able to sell your home, realize a capital gain, and buy a house that is less expensive to own and maintain. You may find a home that better meets your needs in retirement, compared to a larger 3 or 4-bedroom home in the suburbs that requires more maintenance, higher utility bills, and possibly higher taxes. The trouble is, any potential home you consider purchasing may have recently appreciated as much as your current home. You need to consider realistically: would selling your home allow you to reduce your living expenses or realize capital gains that you can reinvest to increase your monthly cash flow? A reverse mortgage for purchase loan may help this transition pencil out.

2.    Take out a reverse mortgage.

A reverse mortgage can be used in a variety of ways to help finance your retirement. You can use a reverse mortgage to purchase a new home without required monthly mortgage payments, provide money to finance improvements to your current home, provide a line of credit to draw from as needed for living expenses, or produce a stream of regular monthly cash flow. You do not need to repay the reverse mortgage until you sell the home, although you can make optional payments to pay down the loan balance if that is a desirable goal.

There are many details you will want to investigate with a reverse mortgage, including the terms and costs. You will also want to explore any misconceptions you might have about this option. For instance, some retirees want to preserve their home as a legacy for their adult children; but their children often say that they would prefer that their parents reconsider how to use home equity to secure their lifestyle and be able to do more than just make ends meet.

3.   Take out a home equity line of credit (HELOC). 

A HELOC is a loan that you can draw upon as needed during the draw period, which is commonly 10 years. During the draw period, your loan accumulates with interest, and you may not need to make loan payments. At the end of the draw period, you will need to start repaying the principal and interest. HELOCs can help bridge the time until you begin drawing retirement income, such as Social Security or an annuity. HELOCs can be useful if you expect to sell your home before the draw period ends. Many local banks and credit unions offer HELOCs with differing terms and conditions so it’s smart to compare the available options.

4.    Enter into an equity-sharing agreement.

A home equity sharing agreement allows you to collect cash payments in exchange for giving an investment company a specified ownership interest in your home. With this type of agreement, you may not have to make a monthly payment toward principal and interest. At the end of the specified term, which can range from 10 to 30 years, you pay the investment company the cash payment it gave you, plus a percentage of the appreciation in your home.

These agreements can help homeowners who are cash poor but have substantial home equity. Before choosing this option, you will want to investigate and make sure that you thoroughly understand the terms and conditions, which can be complicated and costly. More importantly, you will want to plan for the possibility that you will need to sell your home at the end of the specified term. We suggest seeking the guidance of a qualified attorney for this agreement.

5.   House share.

If want to remain in your current home and have extra space, you might consider renting out rooms to supplement your retirement income, which may also provide additional companionship. Of course, there are logistical details and risks that need to be considered when you share your living space with others. To help with this, you might want to use a professional service that can help you find and evaluate roommates and work out the necessary arrangements. There are options available specifically for seniors looking for roommates such as https://www.seniorhomeshares.com/ or https://www.silvernest.com/.

6.   Multi-generational housing.

A variation on house-sharing is for grandparents to share a home with their adult children and/or grandchildren. Not only are you able to share living expenses, but this option might help grandparents age more comfortably surrounded by their loved ones while also being part of a lively family. Being involved in the daily tasks of cooking, cleaning, and caring for each other is beneficial to the entire family. Just imagine the memories you could all make together.

7.   Add an ADU.

You may be able to add an accessory dwelling unit (ADU) to your property that you can rent for extra cash flow. ADUs can be a stand-alone building, a converted garage, or an extension of your current home. A future-thinking retiree may build an ADU that generates rental income and in later years may move to the ADU and rent out the main home to create even more income while rightsizing their lifestyle. You may be able to finance an ADU with a reverse mortgage or a home equity line of credit.

Common wisdom is to have enough cash in savings to cover at least three to six months of expenditures. Some planners recommend holding one to two years in relatively liquid savings for people who are nearing retirement, with some of that in money market funds or in high-yield savings accounts, where returns are rising along with interest rates. It is time to reconsider how to use home equity.

With increased uncertainty looming, we recommend that you explore each option and consider all the ramifications. Hopefully, this list has helped stimulate your imagination to explore ways you can take the sting out of inflation and stock market volatility by reconsidering how to use home equity to increase your monthly cash flow. At Northwest Reverse Mortgage, our goal is to help our clients live better in retirement, despite the economy and the market. Reconsider how to use home equity and take control of your retirement.