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A Guide to Home Equity Loans in Retirement

A Guide to Home Equity Loans in Retirement

| October 21, 2021
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If you are like many of our clients, you’re hoping for a debt-free retirement. And while that is a commendable goal, it also leaves a lot of money on the table that could be put to work accomplishing other financial objectives both before and during retirement. 

In fact, U.S. homeowners have a whopping $9.1 trillion in “tappable” home equity. (1) And retirees in particular have 25-50% of their median net worth wrapped up in their homes. (2) That’s a huge resource that can be utilized to make the most of your financial goals! So, how can you determine if a home equity loan is the right move for you? We’ve compiled this guide to help you make the best decision.

What Is Home Equity?

Put simply, home equity is the portion of your home that you own. It is the appraised value minus any remaining mortgage or loan balance you carry on the home. For example, a home with a fair market value of $750,000 and a remaining mortgage balance of $200,000 has a home equity value of $550,000. That amount is what you can borrow against using a home equity loan.

What Is a Home Equity Loan?

Home equity loans are also called second mortgages because they operate similarly to a mortgage. You receive a lump-sum payment based on the equity value in your home and it’s paid over a set period of time. The payments will be fixed over the life of the loan, consisting of both principal and interest, just like a conventional mortgage. 

A home equity loan can also come in the form of a home equity line of credit (HELOC). HELOCs offer a revolving line of credit against the equity value of your home, as opposed to the lump sum offered in a traditional home equity loan.

How Can it Be Used in Retirement?

Many people think that financial goals and active planning stops at retirement. You’ve made it to your golden years—what’s left to do? That’s a common misconception that couldn’t be further from the truth. Once in retirement, your assets need even more management and planning. There’s a lot left to consider, including:

  • Paying off credit card debt
  • Remodeling your home to help you age in place
  • Delaying Social Security until you qualify for the maximum benefits
  • Purchasing long-term care insurance
  • Paying the taxes on a Roth conversion or your tax-advantaged retirement drawdowns

A home equity loan can be the perfect option to fund these goals and more.  

Is a Home Equity Loan Right for You?

There are many factors to review when deciding if a home equity loan or HELOC is right for you. Here are some points to think about as you weigh your options:

  • Home equity loans use your home as collateral to hedge against defaulting on the loan. This could result in you owning more than your home is worth if the real estate market drops.
  • Interest paid on a home equity loan or HELOC can be deducted on your tax return. This deduction applies only if you use the loan to buy, build, or substantially improve your home. 
  • Closing costs, including lender’s origination fees, will be added to the loan total. Be sure to run the numbers before committing.
  • Home equity loans are best for individuals who have a high level of equity in their homes. This means the original mortgage is mostly or fully paid off. Refrain from tapping into your home’s equity if it’s going to put you in a negative cash flow situation.

Alternatives

If you’re thinking about using your home equity to fund financial goals going into retirement, you can also consider a couple alternatives:

  • Cash-out refinance. This option allows you to refinance your current mortgage for a larger amount than actually owed. The difference can be withdrawn as cash.
  • Reverse mortgage. In order to utilize a reverse mortgage, you must own your home outright. You then take out a loan against the equity in your home. Since these mortgages are only available for individuals age 62 and older, most are never paid back. In this case, the home is sold to pay off the loan. 
  • Downsize. If you want to access the equity in your home, you can always sell it and move to a smaller, more affordable location. The proceeds earned from the sale can go toward your financial goals. 

Review Your Options

Whichever option you’re considering, be sure to review it in the context of your overall financial plan. We at T.A. Holland & Co. can help you do just that. We will get to know your specific situation and work with you to make the most of your retirement funds. Reach out to us at info@taholland.com or 617-523-5656 to schedule a complimentary appointment today!

About T.A. Holland & Co.

T.A. Holland & Co. was founded in Boston, Massachusetts, in 1920, and serves individuals and businesses throughout the country. We provide cutting-edge financial services with a broad array of solutions to help our clients grow and preserve their wealth. We have seen good and bad economic times. Through it all, T.A. Holland & Co. has thrived by always making the customer our #1 priority. We get to know you and understand your needs so we can provide you with the proper guidance and strategies. Our senior vice president, John Hellmuth, has been at the helm of T.A. Holland’s financial services since 1990, but he doesn’t do this job alone. He is joined by his two children, Lindsay Hellmuth and Thomas Hellmuth. As CERTIFIED FINANCIAL PLANNER® (CFP®) practitioners, our financial services team has the knowledge and experience to help you solve your most pressing financial challenges. To learn more about how we can help you, visit our website and reach out to us at (617) 523-5656 to schedule a complimentary get-acquainted meeting.

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(1) https://investor.blackknightinc.com/press-releases/news-details/2021/Black-Knight-Tappable-Equity-Rises-1-Trillion-in-Q2-2021-Alone-to-Hit-All-Time-High-of-9.1-Trillion-Quarter-Also-Sees-Largest-Volume-of-Cash-Out-Refis-in-15-Years/default.aspx

(2) https://www.federalreserve.gov/publications/2020-bulletin-changes-in-us-family-finances-from-2016-to-2019.htm

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