If you’re thinking about retiring soon, chances are you’re looking at every possible asset you have in order to make sure you have enough money to live comfortably, do everything you put off during your working years and maybe even have enough left over to spoil the grandkids.
Here’s a worrying statistic, though: Just 50% of people ages 56 to 73 have $100,000 or more saved to use once their steady income goes away, according to the 2016 Employee Financial Wellness Survey from PwC.
You’re also likely to need the money. Let’s say you retire at 65. According to the Social Security Administration, a male living that long can expect to live to around age 84. If you’re a woman, that number increases to 86. This is a good thing, but it does mean you need to plan for a longer retirement.
That shouldn’t be a reason to panic, but rather a signal for some people that it’s time to pick up the pace.
You could throw caution to the wind and invest in startups hoping to hit the jackpot with the next Facebook, but you would have to be extremely lucky with that plan.
A safer way to give your retirement a little boost is to take a look at the biggest investment most people are likely to have: their home.
There are a few ways to look at this. You could pay off your mortgage early so that, in retirement, you have more money for other expenses. If you don’t want to do that or it’s not feasible, you can take a look at putting the equity you have in your home to work for you. Finally, you could consider a reverse mortgage.
Paying Down Your Mortgage
One way to save more money in retirement is to let less money out the door. For many of us, our biggest monthly bill is our mortgage. Paying your mortgage off before you retire is like adding to your income when you decide to quit the workforce.
There are two ways you can do this. One way would be to shorten your mortgage term to have it paid off by the time you retire. Quicken Loans offers the YOURgage. You can pick any term on a conventional loan between 8 and 30 years.
Let’s say you knew you wanted to retire in 2028. You could refi into an 11-year loan right now and have it paid off. It’s going to be a slightly higher payment than if you took a more traditional 15-year loan, but this may be offset by the lower rate you can get with a shorter term.
On the other hand, if you’re happy with the rate you currently have, it may be better to just pay extra toward the principal. This can save you money on interest over time because you’ll be paying on a lower balance faster if you consistently add to your mortgage payment.
Before undertaking this strategy, make sure you don’t have anything in your mortgage agreement that penalizes you for paying off your loan too soon. To avoid confusion, you also have to specify to the mortgage company that you intend to apply the extra money (over and above the regular mortgage payment) to the principal because you could be prepaying next month’s bill in advance, for example.
Home Equity Line of Credit
As we get older, there are certain things that happen. We slow down and maybe don’t move as well as we used to. Maybe the house needs to be modified to fit a wheelchair. Perhaps using your home equity just gives your retirement fund a boost.
Two common options for these situations are a cash-out refinance and a home equity line of credit (HELOC). Let’s talk HELOCs first.
Home equity lines offer the opportunity to take equity out of your home. The home equity line is a second mortgage you can take out on your home.
The benefit to a HELOC is that the interest rates tend to start extremely low. They start that way, but it doesn’t necessarily end there. Home equity lines work much like an adjustable rate mortgage. Once the fixed-rate period ends, they’re subject to the ups and downs of interest rates across the market. They could go down, but they could also go up.
Quicken Loans doesn’t offer HELOCs at this time.
The other option to take advantage of your equity is to take the cash out of your primary mortgage through a cash-out refinance. You still get a pretty favorable rate because it represents less risk for lenders as you’re likely to make your primary house payment. You also have the option of taking a fixed rate that isn’t subject to market fluctuations.
If you think taking cash out of your home might be right for you, you can find more information and get started here.
Traditional mortgages are great, but you still end up with a monthly payment. If you’re on a fixed income but still want to make your equity work for you, a reverse mortgage may be worth looking at.
How does it work? A reverse mortgage allows homeowners 62 and older to get a loan based on the equity in their home without having to make a monthly payment.*
Reverse mortgages come in a few different varieties:
- Adjustable rate: You can take the disbursement of your loan in a lump sum, monthly payments or as a line of credit. If you set up a line of credit, you don’t have to take any money out when you close. You can let the available money grow with interest until you need it. If you do take any money out, you have the option of paying it back into the account and letting the money continue to grow.
- Fixed rate: The rate of interest is fixed and you get the money in a lump sum payment at closing. Whatever the interest rate is at the time of closing is the rate you’ll pay throughout the life of the loan.
- Purchase: You can also use a reverse mortgage to purchase a home and not make a monthly mortgage payment on the new home for as long as you live there.* This option may work well for someone looking to downsize or move closer to family.
Of course, there’s no such thing as a free ride in life, and the same is true here. You do have to pay the loan back, but not until the youngest borrower vacates the house. The good thing about reverse mortgages is that they’re nonrecourse loans. This means that you only have to pay back the amount the home sells for. If the home sells for less than what’s owed, the FHA pays the difference.
With that in mind, your heirs have three options if you pass away:
- They can sell the home. If the home sells for more than what is owed on your loan, your heirs keep the difference.
- They can choose to keep the home by paying off the reverse mortgage balance or 95% of the home’s appraised value, whichever is less. They can also refinance this amount into a regular mortgage to keep the home, as long as they qualify.
- They can let the home go and allow the servicer to sell it.
If you think a reverse mortgage might be right for you, you can visit our friends at One Reverse Mortgage. You can also connect with one of their licensed specialists at (800) 401-8114.
If you’re interested in a cash-out refinance, you can get started online or call (888) 728-4702. One of our Home Loan Experts will be happy to go over your options.
*The homeowner is still responsible for maintenance, taxes and insurance.
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