Using home equity to pay expenses in retirement isn’t a new concept among retirees, but financial experts who weighed in say the strategy requires careful planning.
Home equity options include cash-out refinancing and reverse mortgages. One of the differences is that there are no monthly payments with reverse mortgages.
“With a reverse mortgage, the loan is repaid when the homeowner moves out, sells the home, or passes away,” financial technology firm Monorail CEO Phillip Dickson told NTD. “This can provide tax-free income, a line of credit, or a lump sum to supplement retirement savings.”
"Ideal homes are those in growing markets with strong resale or rental potential, single-story layouts for aging in place, low maintenance requirements, and proximity to essential services like health care, public transportation, and community centers," Dickson added.
Like a reverse mortgage, cash-out refinancing consists of borrowing on the equity that's built up in an individual’s home.
“You're basically taking out a new, higher mortgage to extinguish your original one,” Florida realtor and Lexawise founder Alexei Morgado told NTD. “You get the difference in cash, but you're still supposed to have monthly payments like any normal mortgage.”
“Cash-out refinancing is becoming increasingly popular,” Morgado said. “Even if interest rates are a little bit higher than they were before, the idea of borrowing against that equity and turning it into available cash is extremely enticing.”
Those monthly payments can be a downside for people who are retiring on Social Security income and don't have a lot of retirement money saved up.
Some 73 million Americans collect Social Security benefits, according to Social Security Administration data, and the average retired worker receives $2,002.39 per month.
“A monthly mortgage payment can be a huge anxiety trigger if not planned for,” Morgado added. “It's ideal for those who have a long-term budget plan and know they can afford to make the payments without having to string themselves along too hard.”