Several ways for retirees to tap their home equity for extra income

Home equity increased to $7.8 trillion for homeowners 62 and older in the third quarter of 2020, according to the National Reverse Mortgage Lenders Association. That’s good news for retirees because their home could provide the key to long-term security.

There are more ways than ever to turn your equity into retirement income. Here are a few.

Refinance your mortgage:

For many retirees, refinancing is the best option if you need to make your money work harder for you. It’s easy to do, and although rates have been inching higher, they are still at historic lows.

“If you’ve got a 4% mortgage or higher and you can go down to close to 3% or less, I can tell you without even running the numbers that you are going to save money,” said Mari Adam, a certified financial planner.

You can save even more on interest if you opt for a 15-year mortgage instead of a 30-year term. Your payments may be higher, but the accelerated payoff means you’ll be mortgage-free quicker and save thousands on interest.

Closing costs for refinancing typically range from 3% to 6% of your new loan amount, so knowing how long it will take to recoup closing costs — and when you plan to sell your home — is essential. Another option for retirees who need extra income is a cash-out refinance. With this, the existing mortgage is replaced with a new, larger one that reflects the home’s current appraised value. Lenders will let you borrow up to 80% of your home’s value, including the new mortgage and the cash you take out.

Borrow with a home equity line of credit:

A HELOC is a revolving line of credit that you can tap whenever you need money. The rate is typically based on the prime rate plus a couple of percentage points. HELOCs provide an initial withdrawal period — usually 10 years — when you can borrow up to your limit. During that time, you may choose to make a minimum payment or an interest-only payment if you qualify. As you repay principal, your available credit is replenished. After the draw period ends, you must begin making principal-and-interest payments, typically over 10 to 20 years.

Take out a reverse mortgage:

A reverse mortgage allows people 62 and older to convert home equity into a lump sum or a line of credit. Instead of repaying the loan monthly, your withdrawals and interest on them accrues until the loan is due. You don’t have to repay the loan as long as you live in the home, but you will have to pay the insurance and property taxes.

When you or your heirs sell your home to repay the reverse mortgage, you’ll never owe more than the value of your home. If your home sells for more than you owe, you or your heirs keep the excess amount.