The effects of the recent economic crisis can still be felt, especially by home owners, who have found out that the value of their investment has decreased because the housing market hasn’t fully recovered yet. Because most investments have lost some of their value, a large number of home owners felt the need to tap into the equity in their homes in order to have enough money for their retirement plans.
Your home is, most likely your most expensive asset, so tapping into its equity will resolve the financial issues that you might have when retiring, but it might not be the best idea to do so. You can access the equity that you have in your home through a home equity line of credit, a home equity loan, or a reverse mortgage, but you should know that there are some risks associated with this practice.
What Are the Risks of Relying on Home Equity When You Retire?
No matter what your retirement plans are, you will still need a home after you are retired. This means that you might have to find other ways of funding your retirement, ways that are less risky. Tapping into the equity in your home through a home equity loan, line of credit or reverse mortgage can be very expensive, and you can end up spending more than you initially were prepared to, or even lose your home. The interest rates, fees, and closing costs are usually much higher for these types of loans than they are on conventional loans.
If you decide to buy a new home and move out, you may find that you can’t afford a new home because the equity in your current home is very low. An alternative to taking out a second loan which will affect your equity is to downsize your home, which will free up some of the equity that you have built up in your home. By doing this, you will have access to funds that will help you with your retirement plans, while still having a roof over your head.
Planning Ahead is Important
Starting to plan your retirement while you are still young will almost guarantee that your retirement will be problem-free. If you wait until you only have a few years left until retirement, there are many problems that could come up. The economic climate can shift radically in only a couple of years, or even quicker, affecting the housing market and the equity in your home. This makes home equity loans and reverse mortgages a very inefficient way of funding your retirement. Predicting what the economy will look like once you reach your retirement years is close to impossible, so knowing if your home will be worth more or less is anyone’s guess.
Not counting on the equity in your home and planning ahead can save you a lot of trouble and headaches once you retire. Investing in real estate properties, savings plans, and/or stocks is a much better alternative to taking out home equity loans and reverse mortgages, even if you didn’t start at a young age. People who are close to their retirement age can still successfully invest their money wisely, and have enough once they retire.
Relying on home equity when you retire is the least efficient way of coming up with retirement funds. You will most likely end up spending more than you have to, and even put your home at risk by defaulting on a reverse mortgage. Planning ahead and starting to invest at a younger age is something that you should look into, because it is much safer and will ensure that you won’t have to worry about your retirement funds.