Three ways home equity can provide future financial independence
Include your home equity as an asset when planning for your retirement.
As the housing market continues to rebound and home values increase, many homeowners are in a position where there is equity in their homes. Home equity is the difference between the value of the home and the balance owed on a mortgage. If there is no mortgage, then the equity is the value of the home. Left alone, that equity continues to build over time. The equity in your home can be part of your retirement planning strategy. Here are three tactics to consider:
- Use the equity in the home to pay off higher interest rate debt faster by taking out a Home Equity loan. By consolidating debt like credit cards at a lower interest rate, they can be paid off faster and free up income to save for retirement. It’s important to remember that this is only a good option if the homeowner doesn’t go back to using the charge cards they paid off. Incurring that debt again defeats the purpose of consolidating the debt in the first place and can possibly put the homeowner in danger of default with both the new home equity bill and the charge card bills. The purpose is to free up cash for retirement, not go back into debt.
- If there is a lot of equity in the home, consider downsizing to a smaller residence. This can be a difficult choice to make as moving to a new place can be hard to do. However, lower or no mortgage payments can make managing finances less stressful and be a positive trade-off to leaving your home. By choosing to sell, the profit made from the sale can be used to invest in:
- A smaller house with little or no mortgage payments.
- An investment for a future income source.
- To pay off any other outstanding debts.
- Take out a Reverse Mortgage to eliminate monthly mortgage payments and use the equity for income or home improvements. With this option, all existing mortgage loans are paid off and the homeowner can use the remaining home equity to supplement their other income, do home improvements or for any reason they choose. They are still responsible for paying the property taxes and homeowners insurance but not having that mortgage payment frees up additional cash. There are risks associated with a reverse mortgage as well as fees charged when taking out the loan. If the homeowner doesn’t maintain the taxes and insurance, stops living in the home for than 12 months or it fall into disrepair, they could face foreclosure.
Any of these possibilities can be used as a tool to utilize the existing equity in your home to make retirement and the planning process to retirement a little easier. As always, check with your financial adviser to see if these options will be beneficial to you.
Michigan State University Extension offers financial literacy and homeownership workshops throughout the year to help you become financially healthy. For more information of classes in your area, go to either http://msue.anr.msu.edu/events or www.mimoneyhealth.org. Additionally, you can take the Financial Health Survey at MI Money Health to access if you’re financially healthy and discover more ways you can improve your financial health.
Michigan State University Extension has released a new toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at MIMoneyHealth.org.