For many people nearing retirement, their home is likely to be their single most valuable asset. However, it’s questionable whether or not you should be using home equity for retirement.
It’s common to use home equity loans and reverse mortgages to access home equity to pay for retirement expenses. As many as 50% of those over the age of 50 report they are planning on using home equity funds for retirement. This number is much higher than it’s been in the past.
However, there may be more risks than you’ve previously realized.
Consider these risks regarding home equity and retirement:
1. Most Investments Have Lost Value
The housing market is still struggling to recover and home equity levels have dropped in recent years in most markets. Other investments have not done well either.
It’s likely the decreased value in other investments is driving homeowners to rely on home equity. Your home equity might be less than you think.
Plan for the worst and hope for the best. What if your home equity was half of what you expected at retirement? Could you successfully navigate that challenge? What can you do now ‘just in case?’
2. You Always Need A Place To Live
The more financing you have against your home, the greater the risk of losing it should something go awry. Reverse mortgages and home equity loans deplete home equity.
If you decide or are forced to move, you might not have enough equity left to purchase that smaller home or condo.
Many forms of home equity lending have higher fees and expenses than you may realize. Be certain you understand just how much that money is costing you.
The conversion of one asset to another is almost always associated with a cost. Ensure that cost is accounted for and understood.
3. Economic Conditions Can Change
The economic climate now is lukewarm, at best. But in time, that will change. It’s likely that home equity levels and investments in general will get better.
Keep in mind you can’t predict what the economic conditions will be when you retire. The further away your retirement date, the more risk there is in trying to predict it.
It’s always wise to assume the worst. If inflation is high and home prices are low, how viable is it to rely on your home equity?
4. Avoid Using Home Equity Funds Toward Consumable Items
If you must use your home equity, purchasing a vacation or an automobile can be a big mistake.
Accessing home equity funds is analogous to taking on another debt. Taking on a debt at a time when your income is largely fixed is never a good idea.
5. Financial Planning Is Always The Answer
If you don’t have sound financial planning in place, it’s never too soon (or too late) to start.
- Good planning can prevent ever having to use home equity funds for retirement.
- Put a plan in place that makes sense for your income and timeframe and stick to it.
While many plan on dipping into their home equity for retirement, it might not be the best solution. It can be a viable source of funds, but its presence can’t be reliably predicted.
There are many factors that can make the value of your equity decrease between now and your retirement.
Make a good financial plan and stick to it. The ideal situation would be one in which you don’t have to rely on home equity at all.