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What Is Home Equity?

2 Min. Read
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After spending years or even decades building up home equity, many homeowners don’t know they can often access it in retirement without selling the home. Whether you plan to travel or fund your grandchild’s college education, the wealth in your home is a resource that can help you achieve your retirement goals.

How Does Home Equity Work?

Home equity is the value a borrower has in a home, minus the outstanding balance on the existing mortgage. For example, if you finance the purchase of a home for $125,000 with a down payment of $25,000, you immediately own 20% equity in the house, while the lender that originated your loan holds the remaining 80%. As you continue to pay down your mortgage, your equity grows until you own the property outright.

Your home’s value can also increase if your property appreciates. However, it can also decrease if the market declines faster than you pay down your mortgage.

While most homeowners don’t realize that they can tap into the power of their equity, they can use these funds as a potential income stream during retirement.

Of course, selling the house and keeping the profits is one way to tap into your home’s equity. But there are other ways to leverage the stored up money in your house and stay in your home.

What Is a HELOC?

A powerful way to utilize your home equity is with a home equity line of credit (HELOC). While a HELOC is often used to fund home repairs and renovations, it can also be used as a line of credit during retirement for any purpose.

Using a Reverse Mortgage

A reverse mortgage can also be used to access the equity in your house. With a reverse mortgage, you stop making monthly payments on your mortgage, and the lender makes payments to you based on the value of your home equity. These payouts can be made in a lump sum, monthly payments, a line of credit, or a combination of the three.

However, borrowers are still responsible for paying homeowner’s insurance, property taxes, and other potential fees and terms outlined in the loan agreement.

Talk to a financial advisor to find out how you can best utilize home equity to fund your retirement.