Retired adults commonly worry about outliving their retirement savings, and that worry can increase with adverse economic conditions. With inflation at a 40-year high, hitting a record 9.1% in June 20221, combined with a volatile stock market, it can leave many wondering what options they have to supplement their retirement savings.
Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) provides flexibility if you are uncertain of your expenses. By providing a revolving line of credit for a specified time period (loan term), you can borrow up to its maximum amount during the loan term with a HELOC. Lenders may offer loans with an adjustable or fixed interest rate. A HELOC uses your primary residence as collateral against the loan, along with the value of your home is one of the factors in deciding how much you can borrow.
- The benefit of a HELOC is you can use the money towards big expenses such as a home remodel, home repair, or medical bills. The interest may be tax deductible depending on how the money is used.
- The disadvantage of a HELOC is the adjustable interest rate can fluctuate depending on current market conditions and the upfront fees may not be worth it if you are borrowing a small amount. You must also make monthly payments to pay down what you have borrowed.
Personal Line of Credit
A personal line of credit is similar to a credit card. There is a maximum amount to borrow against and your payments are based on how much is borrowed. The primary difference between a personal line of credit and a credit card is a personal line of credit usually has a lower interest rate than a credit card. However, this can make a personal line of credit more difficult to get. Lenders require more screening, including income verification and credit score.
- The benefit of a personal line of credit is that you can draw the cash in increments instead of one lump sum. This can help you fill in short-term gaps in cash flow.
- The disadvantage of a personal line of credit is that it’s not tax deductible and the interest rate can be higher than other loans. In addition, you are required to make monthly payments on the loan to pay it off.
Home Equity Conversion Loan (HECM)
An alternative solution is for older adult homeowners to use their home equity to supplement their retirement savings. A Home Equity Conversion Loan (HECM), also known as a reverse mortgage, is a loan available to homeowners who are 62 years and older and allows you to convert a part of your home’s equity into cash or a line of credit. By eliminating your monthly mortgage payment2, it can provide extra cash flow throughout retirement. Funds can be used to cover daily expenses, medical bills, or even long-term care. It can also help supplement income during an economic downturn.
- One of the benefits is if there’s a traditional mortgage on the home, replacing it with a reverse mortgage loan can eliminate the borrower’s monthly mortgage payment.2 It may also increase cash flow and provide more options for managing finances during retirement.
- The disadvantages of a reverse mortgage are you must be 62 years of age to be eligible and have sufficient equity in the home. In addition, like a personal line of credit, the interest paid is not tax deductible.
To learn more about how a reverse mortgage can help maximize and extend your retirement savings, contact a licensed loan advisor at 1 (800)976-6211.
Disclosures:
1 https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm#:~:text=Consumer%20prices%20up%209.1%20percent,U.S.%20Bureau%20of%20Labor%20Statistics&text=The%20.,government%20websites%20often%20end%20in%20.
2 Your current mortgage(s) and any other existing liens against the property must be paid off at or before closing. You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.