Everyone thinks that you’re going to be living the easy life in retirement. While that may be true to some extent, retirement can actually bring its own share of financial hardships. When you’re not making a steady income anymore, you might find that you don’t have enough money to live a comfortable life, to go travelling, or to do whatever it is you want to do in your golden years.
But if you own a property, there’s an easy and effective way you can boost your retirement income: a home equity loan (AKA, “home equity line of credit”). A home equity loan could be the perfect complement to your retirement savings plan. What exactly is a home equity loan, and how can you use one to give yourself a better retirement? Let’s find out.
Photo by: Nikki Bernadez
Boost Your Retirement Income
A home equity loan is commonly called a “reverse mortgage” because it basically works in the opposite way that a mortgage loan does. On a mortgage loan, you contribute mortgage payments each month and gain a greater amount of equity in the property until you’ve paid off the mortgage. So how does a reverse mortgage work? Here’s how.
With a reverse mortgage, you basically lose equity in your home by taking money out of it. You’ll basically cede some of your property to a reverse mortgage lender, and in return, they’ll pay you for that value of the home.
If you have a lot of equity in your home—or full equity—then a reverse mortgage can put a ton of money in your pockets that you can use for savings or for summer fun.
Here’s how you can make the most of your home equity loan.
Make Sure Your Home is Eligible
You can only take out a reverse mortgage on your primary residence—the place where you pitch your tent for most of the year. If you have multiple properties, you might want to move into the one that’s most valuable—that’ll give you the most lucrative loan.
Sell Your Other Properties
If you own multiple properties, now might be the time to sell your rental home or whatever home you’re not going to be living in full-time. You can use the income to pay for some of your retirement living expenses, or you can pay off your mortgage further—which will give you a better reverse mortgage.
Pay Off as Much of Your Mortgage as Possible
Pay off as much of your mortgage as possible before you take out a home equity line of credit on your property. The more equity you’ve gained in your home, the more money you’ll be able to receive on it each month.
Pay Off as Much of Your Debts as Possible (Or Not)
It’s helpful to pay off as much of your debts as possible before you take out a reverse mortgage so you can use more of those funds for the purpose of enjoyment. But for some people, a reverse mortgage is a great way to pay off debts—many retirees spend too much of their money paying down their debt, so they appreciate the extra funds they receive from a reverse mortgage.
Complete Major Repairs
Most reverse mortgage lenders require you to pay for major home renovations—they can do that because they’re essentially gaining some ownership over your property. Before you take out a home equity loan, try and complete any major repairs that need to be done on your property. Try and fix anything that you can with a few supplies from the home supply store, and for anything else just find a home maintenance contractor online.
Photo credit: Terry Magallanes
Take Out a Reverse Mortgage
When you’ve finally completed all the aforementioned tasks and considerations, it’s time to contact a reverse mortgage lender and take out your home equity loan.
Set Aside Funds for Repairs
As tempting as it may be, try not to spend all your home equity payments on the fun stuff—always set some money aside for home repairs. If something were to happen to severely damage your home, your lender may require that you repair the home with your own funds. Have money set aside to pay for any such repairs.
Reap the Benefit
With the extra money afforded to you by a reverse mortgage, you’ll have more financial freedom to make your retirement a happy one!