Your home is probably your largest and most valuable asset. But is it wise to use your home equity to fund your retirement? Some financial advisors may suggest that home equity loans, reverse mortgages or home equity lines of credit (HELOCs) are good methods for accessing the funds you have tied up in your home and allowing you to live comfortably in retirement, but there may be more risks associated with this practice than what first comes to mind.
Of Americans aged 50 to 70, 47% have reported that they are relying on home equity to fund their retirements, according to a survey conducted by Ameriprise Financial. This figure is an increase from the 39% that provided that response prior to the economic downturn. In addition, 37% responded that they are not currently on track to have their mortgages paid off prior to retirement.
Decreased Value Across Investments
Unfortunately, the housing market has not fully recovered from the economic downturn. In fact, the value of most investments has generally decreased in recent years. It is possible that the decreased value of investments may account for the increased percentage of survey respondents who feel that they will need to tap into their home equity in order to fund their retirement plans.
Reasons to Think Twice
Throughout your retirement, you'll still need a place to hang your hat every night. Ensuring that you have a secure roof over your head throughout retirement may mean ensuring that you find other methods for funding your retirement plans. Reverse mortgages and other types of home equity-based lending may be a lot more expensive than they first seem, as the interest rates and fees associated with them are typically quite high. And if you choose to move after taking out a reverse mortgage, you may be quite surprised to see just how much of your home equity has been depleted, which may impact your ability to purchase a smaller property or to afford any assisted living program you're considering. Avoiding any loans and downsizing your home instead could be one method for safely unlocking some of the equity you've built up in your existing property while still ensuring that you have a secure place to live.
It's important to keep in mind that seasons change, and so do economic conditions. Though the current economic climate may sit somewhere between cool and lukewarm, things will likely heat up again. As the economic situation improves, so will the value of homes and other investments. Likewise, those who purchase a home with the intention of using it to fund their retirement plans cannot predict what the economic state will be once they reach retirement, especially if retirement is far into the future. If the economic climate is strong, then homes will regain their value, but the opposite is also true. It's wise to assume that home prices, inflation and interest rates will rise and fall many times over the time you own your home, and for that reason it is hard to accurately estimate what value your home will hold in the future.
Focus on Financial Planning
There's no denying that planning for retirement at a young age can be one of the best methods for ensuring a healthy, happy and secure retirement. Therefore, learning about methods to save for retirement early can help prevent you from having to tap into your home equity too heavily, if at all. Investigate savings plans, stocks and bonds, and the purchase of income properties, and focus heavily on eliminating debt as early in life as possible. Building a diverse portfolio will provide you with the most stable retirement plan possible. Even if you're close to retirement age, don't become discouraged. You still have options and may be able to gain some clearer insight into what you can do to prepare by taking a hard look at your financial situation or consulting a financial planner.
The Bottom Line
Even if you do choose to use your home equity to assist in funding your retirement, keep in mind that it's not a wise decision to use these funds toward consumables, like a holiday or a fancy car. When you access the equity in your home, you are in essence taking on a new debt, so this decision should never be taken lightly. If you do decide to go this route, thoroughly investigate your options first. Home equity loans and reverse mortgages should be your last option. There may be occasions when they are justified, but you should never rely solely upon your home as a source of retirement funding.