Throughout life, everyone incurs personal risks that can have a negative impact on their finances, whether job loss, illness, or bad investment decisions. When you withdraw from active working life, your income is lower, not to mention that your prospects of earning are smaller or non-existent. The challenge is to figure out what to do ad protect yourself against running out of money. If you’ve paid off your mortgage (or most of it), the home you live in could turn out to be a retirement asset. Nonetheless, tapping into your home equity isn’t a decision you should take lightly.
Home equity: What is it?
Home equity can be defined as the chunk of property that you really own. To figure out how much equity you have in your home, determine your property’s market value and subtract the outstanding mortgage balance. The amount that results is the one that belongs to you. If the housing market booms and your home’s value doubles, your loan balance remains the same; the only difference is that the property’s value increases, so the home equity goes up too. Home equity can be used for major expenses and it’s a cost-effective financing method better than credit cards or personal loans.
If you’re short on cash, your home equity is your biggest asset
You can leave your children a paid-off home or use home equity as a safety net that you can take advantage of in retirement. Just like other homeowners, you’ve built up a lot of home equity in recent years. You could continue to build wealth and not borrow against what you’ve earned or tap into your home equity. Either way, the decision is up to you. Just know that you’re missing out on an important opportunity. If used wisely, the money can fund a major expense or pay off a debt. Used not so wisely, the money could yield a poor return on your dollar.
If you ever end up in a situation when you don’t have any other solution to raise money to cover for daily living expenses, you might want to tap into your home equity. That wealth can be an important resource if you’re facing a tough situation. These days, even people earning a comfortable income often find themselves in over their heads after the economic fallout from the COVID-19 pandemic. According to Global News, roughly 35% of 1,000 Canadians said their overall financial situation got worse over the past year. Depending on your situation, you might want to put your home equity funds to work.
Reverse mortgage: The smartest way to tap into home equity
Home is where the equity is. The most common way to tap into the excess equity is through a reverse mortgage. In case you were wondering what is a reverse mortgage, it’s a financial product specifically designed for retirees, which allows them to continue to stay in their homes while accessing the property’s equity. To qualify for a reverse mortgage, it’s necessary to be at least 55 years old and possess the title to the home. Most importantly, the money borrowed can’t surpass 55% of the home’s value. There are three main options for receiving the money: via a line of credit, a monthly payout, or a lump sum of money.
The payment you receive isn’t taxed, which translates into the fact that it won’t reflect on your Guaranteed Income Supplement or Old Age Security benefits. Unlike a second mortgage or a HELOC, you don’t have to have an income to be eligible. As we all know, it’s harder and harder for an older person to secure employment. The rates on a reverse mortgage can be reduced. For instance, you can take the reverse mortgage amount as a lump sum. That solves the problem. It’s recommended to contact a mortgage professional and discuss your situation. Working with an experienced, competent individual can help you find the right solution.
3 scenarios in which a reverse mortgage is a good idea
As it turns out, getting a reverse mortgage is helpful in retirement. You can convert part of your home equity into cash, so there’s no need to sell. This decision should be taken timely to avoid an unpleasant outcome. If you’re still struggling to make a choice, perhaps this will come in handy. There are various situations when a reverse mortgage is a good idea, which are discussed in what follows.
You don’t intend to move
If you don’t have any plan but to continue to stay in the home for a long time, you can take out a reverse mortgage. The loan is generally paid off when you relocate or pass away. If you’re going to move in a couple of years, tapping into your home equity doesn’t make sense. Your partner, family, or dependents can move in if they want to. Having a reverse mortgage doesn’t change who can live with you.
You can handle the ongoing costs
You must keep up with property taxes, homeowner’s insurance, and home maintenance. If you fall behind, the lender can end the contract and require payment, highlighting that you’ve violated the terms of the agreement. If you’re struggling to make payments, don’t worry because there are state and local programs you can apply for.
You have no plans to bequeath your home
Are you thinking about passing down your home to your children? That’s not such a good idea. Your heirs will have to repay the full loan balance to keep the property. Your loved ones may not have the necessary funds to pay off the balance and will have no other choice but to sell the home. You should get a reverse mortgage only if you’re not concerned about leaving your home to anyone.
All in all, every situation is unique. Home equity can turn out to be the strongest asset you have to help you survive tough days. If the equity that is tapped into your home can help you over the long haul, then it’s well used. Don’t give it a second thought.