Home equity is the cash balance between the property’s market value and what you owe mortgage financiers. A wise decision on using home equity will help you meet significant financial obligations and live a stress-free life after your career.
Read on to discover effective ways of using equity and the benefits you’ll obtain from a home equity loan.
First off, we take a look at the case of Bob and David.
Bob and David are next-door neighbors who work for the same company. They both live in a leafy suburb in houses having the same market value. However, they don’t set aside any savings for their retirement.
Soon, they retired from the company at the same time, aged 62 years. Bob immediately draws his social security, while David, on the other hand, forfeits his social deposit for eight more years. He signs up for a reverse mortgage to sustain a living.
Eight years later, Bob has monthly social security of $1,500 compared to David’s $2,600+. Whenever they both draw money from their IRAs, Bob incurs extra tax charges from social security, part-time income, and IRA. David, on the other hand, has a Home Equity Conversion Mortgage (HECM) which is not taxable.
Unfortunately, both friends pass on at age 85, leaving behind their widowed wives. By now, Linda (David’s wife) has more money in her IRA, and her social security check is double that of Diane (Bob’s wife).
Every time Linda draws her social security, she pays out her HECM diligently and gets a tax deduction on interest earned. Diane, on the other hand, can barely make ends meet. She struggles with insufficient social security and high real estate taxes. Moreover, a dwindling IRA means she must borrow on her credit cards or sell the home to avoid additional tax accumulation.
Linda is a happy widow who lives a hassle-free retirement, thanks to her late husband’s wise decision.
From the case of Bob and David, we can confidently say that the proper use of home equity is key to financial security in retirement.
Effective Ways of Using Home Equity
Home equity is an essential financial asset that guarantees remarkable outcomes if used properly. Whether you choose to sell your current home and move to a new one to increase equity or use it for home improvement, it all depends on you. However, when using equity, you should consider the long-term benefits of your retirement.
Below are three effective ways to use home equity:
1. Buy a New Home
If you’ve lived in your current home for a long time, or wish to relocate to a new city for a job transfer, then you would consider selling your home. Equity, therefore, comes in handy when buying your new home.
Assuming your home is worth $200,000 with accumulated equity of $50,000, you’ll boast an additional $50,000. You can then use your equity as a down payment for a mortgage from a financier.
Using a high down payment, you can negotiate for a larger, more expensive home. Eventually, a larger down payment means you’ll have a smaller mortgage and a lower monthly payment.
2. Plan for Your Retirement
If you are 62 years old or more, a good way to unwind for your retirement is to invest in your equity. Like David, you can sign up for a reverse mortgage on your home equity.
With a reverse mortgage, you won’t incur monthly mortgage charges. Additionally, you’ll get a paycheck based on your equity.
Regardless of your equity, you can opt for a monthly payment, one-off lump sum, a line of credit or a combination of all three options.
The best thing about a reverse mortgage is that you won’t pay back the loan as long as you occupy the home. In case you pass on, your heirs can sell the home to offset the loan and use the extra profit for other investments.
3. Give Your Home a New Look
A home renovation project with a long timeline is possible using equity. You could sign up for a home equity credit line to buy construction materials and equipment.
The advantage of a credit line is that you only pay for interest charged on what you borrow. Without additional closing costs, you can be sure of repaying the entire balance as soon as your loan term expires. Moreover, you’ll have an improved aesthetic appeal and increased value for your current home.
Benefits of Home Equity Loans
Home equity guarantees a flexible and easy way to get instant cash when you require it. Besides the flexibility of payments, they offer the following benefits:
1. Low-Interest Rates
Unlike conventional loans, home equity attracts a lower interest. Thus, you can save on interest costs and improve your periodic cash flow.
2. Tax Deductions
A home equity loan comes with the benefit of tax cuts. Since the passing of the 2017 Tax Cuts Act, homeowners have enjoyed a deduction on the interest charged for equity loans where the money borrowed goes into building, buying, or improving the home.
Home Equity: What Are Your Investment Options?
If you are married, it is that time you took control of your retirement. It all begins when you tap into your home equity.
Like David, you want to be sure you make the right financial decision that will leave your spouse and heirs living a peaceful life when you pass on.
For help on how to calculate home equity and your investment options, consult a finance expert.