ShareSave Strapped for cash? You might be able to liquify some of your home equity to cover expenses by using a home equity conversion mortgage, which is essentially a reverse mortgage backed by the Federal Housing Administration. The organization is federally insured by HUD; the agency guarantees the lender will be repaid. These products, which have been gaining traction over the past five years, peaked in popularity in 2009. They work best for seniors who need more income and credit and intend to remain in their homes for the rest of their lives. 
Playing by the rules There are two main requirements for holding an HECM: You must be at least 62, and the principal must be repaid if you move out, sell or pass away. In addition, you must own the property or have a substantial mortgage with at least 50% equity, and you must continue to occupy it as your primary residence, not as an investment or a vacation home. You will also need to engage in an informational session with a HUD-approved reverse mortgage counselor. You may not be allowed to borrow against the entire value of your property. Some limitations depend on the age of the youngest borrower or non-borrowing spouse, the level of current market interest rates and HECM limits ($1,089,300 in 2023). Generally, older homeowners with higher-valued properties will fare better. Compare a reverse instrument to a traditional mortgage; for the former, the debt component increases over time, adding to the balance. At the same time, remember that you will still need to make payments on your property taxes and homeowners insurance, and pay for general maintenance and upkeep. As the IRS considers the proceeds a loan repayment rather than income, interest charges are not tax deductible before the loan is paid off. Proceeds are payable either as a single lump sum or in variable options, typically a monthly disbursem*nt or a line of credit. You may spend them however you like, for either urgent or more discretionary spending. You might need to cover an unexpected job loss or health issues, pay off an existing mortgage, or simply choose to spend on travel, entertainment or home improvements. Wealthier retirees sometimes elect to diversify their portfolios with the added income stream. Attractive features An HECM offers some compelling advantages if your circ*mstances fit: - You can plan on staying in your "forever" home, where you are settled, and can perhaps renovate it, allowing you to age in place.
- You can enjoy a reliable cash flow in order to provide more comfortable senior years.
- You need not make monthly payments on the loan balance.
- Your spouse can usually remain in the home even if you die or move to another accommodation.
- You can pay off debt balances, such as medical bills.
- You can use the proceeds to pay off existing mortgages and thereby prevent foreclosures.
- You can avoid paying withdrawal penalties on other retirement accounts.
- You can fund a grandchild's education or any other meaningful purpose.
- Integrated protections limit your heirs' responsibilities.
But is it right for you? There are several significant drawbacks, so seniors must take extra care with such an important decision: - Fees tend to be high, including upfront financed origination charges of about 2% and around .5% for annual review of mortgage insurance premiums.
- You could compromise your benefits from needs-based programs, such as Medicaid.
- You could inadvertently default by failing to meet loan requirements, including by living outside the home most of the year, neglecting property taxes or home insurance, or not making maintenance repairs. An unresolved default might lead to eviction and foreclosure.
Alternative loans may be more appropriate. For example, those under age 62 could use home equity loans (HELOCs). More expensive properties may require a jumbo reverse mortgage, with higher interest rates but no mortgage insurance. By contrast, single-purpose reverse mortgages are cheapest and can be used for specified expenses such as taxes or repairs. Your financial advisor can help you compare different types of reverse mortgages, payment options and other considerations. ShareSave Your Comments | Saved Articles
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FAQs
Financial advisors typically don't count house value as part of retirement income.
How do I use my home equity to fund retirement? ›
Recommended options for how to use home equity in retirement often include things like:
- Paying for healthcare expenses.
- Remodeling your home to age in place.
- Moving into a new home or long-term care facility.
- Paying off higher-interest debt such as credit cards.
- Supplementing your monthly income for living expenses.
Financial advisors typically don't count house value as part of retirement income.
How do I know I saved enough for retirement? ›
Check your current retirement savings balance to confirm you're on track. You can use the benchmarks 1X salary by age 35; 3X salary by age 45; and 5X salary by age 55 as a guide. Ramp up your contributions if you determine you're behind.
How do I ensure I have enough money for retirement? ›
One well-known method is the 80% rule. This rule of thumb suggests that you'll have to ensure you have 80% of your pre-retirement income per year in retirement. This percentage is based on the fact that some major expenses drop after you retire, like commuting and retirement-plan contributions.
Can I withdraw my home equity? ›
Once you have enough equity built up, you can access it by taking out a HELOC, a home equity loan or by using a cash-out refinance. Taking out a loan on your home equity can provide funds for costs such as medical bills, college tuition, home improvements or other reasons.
Can you use retirement funds to buy a house without penalty? ›
Buying a Home With IRA Funds
There are two key benefits to using money from a Roth IRA for a home purchase. First, you can take out up to $10,000 as a first-time home buyer without an early withdrawal penalty. Second, you don't owe income taxes on the amount, since Roth IRAs are funded with after-tax dollars.
How much of your net worth should be in your home in retirement? ›
According to some experts, the optimal range for home-ownership is between 10% and 30% of your net worth. Rental properties and passive income: Rental properties are another common and attractive form of real estate.
What is the average equity at retirement? ›
The average retirement savings for all families is $333,940 according to the 2022 Survey of Consumer Finances.
Does 83% of personal wealth comes from home equity at retirement? ›
A full 83% of an average American's wealth at retirement comes from home equity! US homeowners are leaving $100billion of wealth on the table, every year! …and you're one of them. This is much bigger than “just” refinancing.
As a result, an oft-stated rule of thumb suggests workers can base their retirement on a percentage of their current income. “Seventy to 80% of pre-retirement income is good to shoot for,” said Ben Bakkum, senior investment strategist with New York City financial firm Betterment, in an email.
Is $10,000 a month a good retirement income? ›
In a world in which the average monthly Social Security benefit is just over $1,792, it may seem like a pipe dream to live off $10,000 per month in retirement. But the truth is that with some preparation, dedication and resolve, many Americans can reach this impressive level of retirement income.
How long will $400,000 last in retirement? ›
Safe Withdrawal Rate
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
How to retire at 65 with no savings? ›
If you determine you need more than Social Security income to meet your retirement needs, consider these options:
- Set a detailed budget to minimize expenses. ...
- Downsize your home. ...
- Continue working. ...
- Take advantage of tax-advantaged retirement plans. ...
- Open a traditional or Roth IRA.
If you're planning to live frugally in retirement, spending under $50,000 a year may sound achievable, but it's not a realistic target for every couple. For one thing, it's all too easy to underestimate what you'll spend in retirement if you're not making a detailed budget.
What is the average 401k balance for a 65 year old? ›
Is primary home equity a good asset for retirement? ›
Given that home equity is such a big part of your net worth, using some of it to boost your retirement security can make sense. But only if you manage around the risks. If you don't keep up with the terms of lines or loans, you could be required to sell your home.
How do I use my home equity to my benefit? ›
Technically, you have the flexibility to use a home equity loan or HELOC for anything. The funds you receive can be used for a wide variety of purposes, including paying off credit cards, funding home improvement projects or purchasing a vehicle.
How much equity do I need to retire? ›
At age 30, some financial professionals suggest accumulating the equivalent of your current annual income. By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10-12 times your income at that time to be reasonably confident that you'll have enough funds.
Can you use a HELOC for retirement income? ›
While accessing money from a home equity line of credit is not income, drawing from a HELOC is one of the retirement strategies that could help finance unexpected expenses, like medical bills or substantial home repairs, without drawing directly from your retirement savings nest egg to pay for the expense.
