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Is It a Good Idea to Tap Your Home Equity in Retirement?

home equity in retirement

by Brenda Bonin

Do you know how much home equity you have?

I’m going to let you in on a little secret, if you’ve owned your home for 2 years or more, you probably have a lot more home equity than you realize. My clients are often shocked when they learn their current equity position. The reason? It’s due to the high rate of appreciation that we’ve seen over the last five years and especially in the last 24 months.

Home equity is the difference between the current value of your home and any loan balance that is secured by your home. For example:   if your home value is $400,000 and your mortgage balance is $150,000, you have $250,000 in home equity. If you have no mortgage, home equity = home value.

So, would you like to know how much home equity you have?  And if you did learn about your housing wealth, what difference does it make?

Why paying off your mortgage is not always the best solution

For the longest time, many viewed home equity as untouchable, a sacred cow of wealth.  Many are still of the mindset that it is best to own your home free and clear and pay off any mortgage as soon as possible.  There are some problems with this thinking. First, home equity is illiquid.  It’s not worth anything until you turn it into cash.   Second, some people trade off saving adequately for retirement by paying extra on their mortgage.   Another problem is that some people run up high-interest credit card debt due to poor cash flow, without considering credit card interest is more than than times higher than mortgage interest.  If you think mortgage rates are high, take a look at your credit card interest rates!

Last year, one of my clients contacted me to looking to refinance his second home to a lower interest rate. His goal was to lower his payment.  Unfortunately, he didn’t qualify due to a significant amount of credit card debt.  He thought he would need to sell either his residence or his second home, which felt like a big blow as he and his wife really enjoy both homes.   In looking at his big picture, we came up with a double home equity strategy. The first step was to do a Home Equity Conversion Mortgage on his primary residence.  This step gave him access to over $200,000 in equity, and eliminated his loan payment of $1400.   With this payment gone, we were then able to revisit refinancing his second home, and did a cash out refinance on this property.  We paid off about $70,000 in consumer debt.  While his mortgage payment increased slightly, his overall cash flow increased by $3000 per month.  He and his wife were relieved and ready to enjoy their retirement.

home equity for retirement

The bottom line

So, is it a good idea to tap your home equity? There’s no one response that works for everyone, so the answer might change depending on your unique situation. It is important to do the analysis and consider all options. It all depends on the big picture and how using home equity can contribute to your overall financial fitness. Be sure to consult with trusted resources that can help you get the information you need to make a decision that will improve your financial picture.  

It is not a good idea to be in the dark about your home equity position and simply sit on it.

ABOUT THE AUTHOR

brenda bonin

Brenda Bonin is a mortgage consultant serving the DFW area for 20 years. She views a mortgage as a financial instrument that can help homeowners achieve their big picture financial goals. She is passionate about getting families the right mortgage when they purchase their home and when they can benefit from a refinance. This includes offering the HECM (Home Equity Conversion Mortgage), specifically for homeowners age 62 and wiser. Reach Brenda at Brenda.Bonin@Fairwaymc.com   or www.BrendaBoninHomeLoan.com

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