Advice for older homeowners – Sentinel and Enterprise
Advice for older homeowners – Sentinel and Enterprise

Older homeowners who need cash might consider converting some of their home’s equity into a loan. (Getty Images)

By Taylor Getler | NerdWallet

For many retired homeowners, a large portion of their wealth is tied up in their home equity, which is the value of their home minus any remaining liens. According to the Urban Institute, home equity accounts for 47% of the net worth of the average white homeowner age 62 or older, 81% of the total net worth of older Black homeowners, and 89% of the total net worth of older Latino homeowners.

If you’re looking for ways to cover your expenses after retirement, you may consider converting some of your home equity into cash. “There is no one-size-fits-all ‘best’ source of cash flow in retirement,” says Andy Panko, owner of Tenon Financial in Metuchen, New Jersey, and a certified retirement income specialist. But those who are hesitant to tap into their home’s equity “may be depriving themselves of a great source of cash flow during their retirement years.”

It’s important to think carefully about what you want to leave behind, if anything. If you want to leave your home as a legacy, “generally you should try to avoid having a mortgage on the property when you die,” says Panko. But if that’s not your top priority, “it might make sense to ‘unlock’ the equity in your home and leverage it via a mortgage during your lifetime.”

Options include a home equity line of credit, a home equity loan, a reverse mortgage or a home equity investment. Which loan product is right for you depends on why you need the money, says Anneliese Lederer, senior legal counsel at the Center for Responsible Lending in Washington, DC.

Here are some things to consider when thinking about accessing your equity.

HELOCs: for qualified borrowers who want flexibility

If you need cash to finance a multi-step project, such as making your home more handicap accessible, you may want to first consider a Home Equity Line of Credit (HELOC).

A HELOC is a flexible line of credit that you can use as needed, up to a certain limit. You usually have 10 years to benefit from the line, during which time you only have to pay the interest.

After 10 years, you can no longer withdraw and payments include both principal and interest. HELOC interest rates are usually variable, meaning they fluctuate with a bank base rate, called the prime rate.

If you’re retired, you may need to provide lenders with alternative proof of income to qualify for a HELOC, including retirement income, Social Security benefits, or withdrawals from retirement accounts. Like any applicant, you’ll need to show that you can make the monthly payments.

If you can’t make your monthly payments, you risk losing your home through foreclosure.

Home equity loans: for qualified borrowers who need a lump sum

If you need to liquidate some of your equity to finance a one-time expense like replacing your roof, you may want to consider taking out a home equity loan.

This is a second mortgage with a fixed interest rate where the money is paid out in one lump sum.

Like a HELOC, you must prove your ability to pay before a lender will consider granting the loan, and a home equity loan can result in foreclosure if you can’t make the monthly payments.

Because the home equity loan is a fixed rate, payments are more predictable than with a variable rate HELOC.

Transferring a home with a home equity loan or HELOC

If you are unable to repay a HELOC or home equity loan within your lifetime, there may be consequences for your heirs.

Under U.S. law, lenders are not allowed to enforce maturity clauses (where the loan must be repaid in one lump sum after your death) if your heirs are relatives or a spouse. These “protected” family members could continue to make monthly payments on the remaining loan balance. If you plan to leave the home to someone who doesn’t qualify under U.S. law, you may consider including them in the loan when you apply to facilitate a smooth transfer.

Get advice from an estate planner specific to your needs and goals. For example, Monique D. Hayes, founder and CEO of Estates Made Easy in Miami, Florida, points out that putting real estate into a trust may not be appropriate for someone who wants to put their home into a trust.

Reverse mortgages: for borrowers ages 62 and older who are struggling with bills

If you want a more permanent financial change that allows you to stay in your home, a reverse mortgage might be a good fit for you.

This loan, also known as a home equity conversion mortgage or HECM, is backed by the Federal Housing Authority (FHA) and doesn’t have to be repaid until you move or die, at which point repayment becomes the responsibility of your heirs. If you want to use your equity to help your family build multigenerational wealth, “that’s a big downside to reverse mortgages,” Lederer says, because your heirs have to sell the property or pay back the loan.

You must be at least 62 years old to qualify for a reverse mortgage, and you must meet with a housing counselor before pursuing this option. These counselors provide advice to homeowners for free or for a nominal fee. You can find a counselor in your area through this Consumer Financial Protection Bureau portal. The counselor will look at your goals, financial shortfall and income history to determine whether a reverse mortgage is a suitable choice, Lederer says.

Reverse mortgages have no income requirements, but borrowers must be able to meet obligations such as property taxes and homeowners insurance. Panko says, “A reverse mortgage can be a great solution for someone who owns a home but otherwise doesn’t earn that much.”

Home equity investments: for borrowers who do not qualify for a conventional loan

If you don’t qualify for any other options and need a solution with more flexible application requirements, you might be interested in a home equity investment or equity participation agreement. Traditional lenders don’t offer these – instead, it’s a niche product offered primarily by companies that specialize in these transactions and typically have much lower credit requirements than HELOCs and home equity loans. Some big names you might notice during your research include Point, Unison, and Hometap.

With a home equity investment, you can receive a portion of your home’s equity as a lump sum payment and in return pay the company a percentage of your home’s appreciation. Unlike typical loans that require monthly payments, here there is a final payment that is due after 10 to 30 years (or when you move), when you must either sell the home or pay the investment company’s share out of pocket. The amount of this final payment is a percentage of your home’s appreciation from the time you signed the agreement. However, these companies often lower the original value of your home to increase the amount of appreciation they can receive.

You may end up paying out much more than you received. For example, Point points out that if your home appreciates at a relatively low rate of 1.5% per year, you could owe more than double your original cash advance in just 10 years. The more your home appreciates in value, the more you’ll end up owing.

There is no one-size-fits-all approach to overcoming a financial deficit with your home equity. Weighing your options and speaking with a real estate professional can help you determine the best course of action for your situation, while shedding light on your goals for your property during your lifetime and beyond.

Taylor Getler writes for NerdWallet. Email: [email protected].

By Aurora