You may have heard recent news stories reporting how housing values in the DFW area have been soaring of late and suggesting that perhaps now is the perfect time to tap into your home’s equity.
Consider the big picture of what that might mean for your retirement years, however, before you leap into action. Is that horizon a number of years away or in the immediate future? Is trading up or downsizing more realistic if you’re considering making a change?
According to a recent survey, 47% of people aged 50 to 70 expect to use their home equity to fund their retirement. If you are among that group, how might you access the equity and how long could those funds realistically last?
The beginning answer to that question starts with a realistic assessment of what your annual spending needs may be in retirement, as well as identifying the sources and amounts of income that you expect to receive. If the gap between annual target spending and annual income sources is large, you will probably need to take larger withdrawals from your personal savings. And that will likely deplete your resources much more quickly.
How large might your personal savings pool be if you should downsize? Might it last 5 years at a maximum? If so, you should probably re-think your retirement and spending goals.
You may find some big surprises if you’re planning on taking out a reverse mortgage to fund a large portion of your retirement spending needs. Proceeds available through a reverse mortgage are limited to a portion of your home’s value. The DFW area did not experience the sizeable leaps in housing values that were common in some parts of the country a few years back. So actual equity can be much less than that found in some other areas.
Fees also cut into the equity available from a reverse mortgage. These types of fees typically total larger amounts than those associated with a conventional mortgage. In addition, any net equity available will be reduced should you have a current outstanding mortgage since paying off any mortgage balance is a condition for the reverse mortgage approval.
So think carefully before being lulled into a false sense of security related to tapping into your home’s equity. Yes, your home’s equity may be a valuable resource for your retirement years. But be realistic on the amount this resource can provide. Proceed carefully and slowly.