Home Value

Get more out of your home by using it to pay for expenses

Fact checked by Catherine Gianaro

 

I’m in my late 50s, and I have retirement on my mind. I worry about whether I’m saving enough, whether I’ll outlive my savings. And I know I’m not alone.

With people living longer and the ever-increasing cost of healthcare, these are not insignificant concerns. In fact, many older homeowners are turning to an unexpected source of funding to help pay for healthcare: the equity in their homes.

While every person’s situation is unique, a better understanding of the various options can help those facing this decision.

Different Ways to Access Your Equity

Recent statistics from the investment firm Fidelity show that the average 65-year-old can expect to spend $157,500 on health and medical expenses during retirement. If you own your home and have limited resources, you may need the equity you have in it to help pay for those expenses (or other ones). Some of the ways to access equity in your home include:

· Reverse mortgage loans

· Home equity loans

· Selling your home to a third party

· Selling your home to your adult children

 

Let’s take a closer look at each option.

 

Reverse mortgage

What to know: A reverse mortgage is a program for people over age 62, to gain access to the equity in their home, says Terri Brady, reverse mortgage loan specialist at One Trust Home Loans in Chicago. Eligibility depends on three variables: your age, your home’s value, and current interest rates.

“It’s the same idea of a home equity loan, but it gets paid back when you are no longer in the home.” Once the reverse mortgage is set up, you can opt to receive a monthly payment, take a lump sum at the closing, or withdraw money as needed.

Reverse mortgages haven’t always had the best reputation, but the reverse mortgage program was revamped from 2008 to 2015 to help protect borrowers. Look for an experienced lender who specializes in reverse mortgages and will work with you even after the closing, Brady says. To qualify, you must show the ability to maintain the property and pay property taxes and homeowner’s insurance. Costs associated with getting a reverse loan — like the title and recording fees, and the mortgage insurance and lender fees — are embedded in the loan itself.

Home equity loan

What to know: This option (as with the former) puts your investment in your home to work. Eligibility is determined by your income-to-debt ratio. If your income is limited (which it might be in retirement), you may not qualify for a large home equity loan. Unlike a reverse mortgage, which gets repaid when you leave your home, you must make monthly payments on a home equity loan until it’s paid off.

Selling your home to a third party

What to know: The best way to access equity in your home is to sell it outright. Then you can invest the proceeds into an income-producing instrument like an annuity or another investment, says Meredith Banta, realtor and senior real estate specialist at @properties Christie’s International Real Estate in Chicago. Before you do that, though, “start with market analysis: What is the house worth?” Banta says. “Is there a mortgage that you have to pay off? How much cash flow will you get from the sale?”

It’s not only financial issues that factor in. People often struggle with the idea of leaving their homes, especially if they’ve lived there for decades and raised families there. “You have to think about what your idea of ‘home’ is,” Banta says. “You may have to redefine that.”

Homeowners must also clean, organize, update, and stage their homes for sale, which can be stressful and time-consuming.

Selling your home to children or other relatives

What to know: This option keeps it in the family, literally, and can be an appealing choice for that reason. However, the numbers have to work, Banta says. “To me, the issue would be: Are the children willing and capable financially to pay the parents their fair market value? The parents should not be sacrificing. They need the money, and the home is supposed to be an asset that provides for the parents.”

Choosing the Right Option

Once you know your options, think about your potential healthcare needs and how you’ll pay for them. Do you want to age in place? Or do you plan to sell your home to downsize or move to an assisted living facility in the near future? Do you have adult children who would like to purchase the family home or who can help support you to stay there as long as you want?

Consider factors including:

•  Your health (and that of your partner or spouse)

•  How long you plan to stay in your home

•  Your current financial situation, including whether you can afford to maintain your home

•  How much work your home may need for you to age in place

•  Local support (friends, family, caregivers)

 

Finally, keep in mind that you may need more money than expected; a health crisis can quickly eat up your savings.

“Ninety percent of people have no idea of what their later life could cost them,” Brady says.

Consider your home as one piece of your larger financial picture, and talk to your financial adviser — and your family. A thorough understanding of all your options can help you make the decision that works best for you.

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Originally published in the Summer/Fall 2024 print issue