The golden years can be full of joy, meaning, and purpose. Nonetheless, it’s not all sunshine and rainbows. One of the most common situations you’ll find yourself in is where you have most of your assets tied in the home. The home you inhabit is valuable, yet you don’t have liquid assets, so you can’t spend your wealth. As a matter of fact, you struggle to cover basic living expenses, let alone to go on a vacation and get away from it all. This is what is called being house-rich but cash-poor. Home equity is most concentrated among individuals who have lived in their homes the longest – retirees, in other words.
Is it bad to be house-rich and cash-poor?
If your expenses are larger than your income, you’re under a lot of financial stress. All the assets in the world are useless if they can’t be converted into cash while medical bills and other expenses keep mounting. You’re forced to make hard financial decisions. Countries like Canada have witnessed unprecedented increases in home prices. This is concerning, given that wages have barely budged. To put it simply, being house-rich and cash-poor isn’t a great place to be. Even the tiniest financial hiccup can mess up your life. It can create a pothole on the road of life.
An ever-increasing number of people are finding themselves in this situation where they reach retirement without enough savings. Housing is good, and there’s no doubt about it. Nevertheless, it’s necessary to make non-residential investments. New investment outside of housing was so weak that Canada’s stock of non-residential capital fell last year. As people reach their mid-50s, they’re forced to dramatically cut their spending or keep working to survive, transitioning from near-poor to poor. It’s definitely something hard to navigate. This statement might sound inadequate, but it’s the truth. Poverty is a major threat to well-being.
A reverse mortgage allows you to access some of the equity in your home
The question now is: What you possibly do? Well, you can borrow against the equity you’ve built in your home. In recent years, an option has appeared that appeals to many homeowners: reverse mortgages. A reverse mortgage is a type of loan that enables you to obtain money from your home equity without having to sell the property. The loan is secured against the value of the home and is available to people over the age of 55. You’re allowed to borrow up to 55 percent of the current value of the property. The maximum amount of money you can borrow depends a lot on your age, the home’s appraised value, and the lender.
Reverse mortgages were created so as to enable borrowers to use the proceeds to pay for essentials such as health care or living expenses. At present, the proceeds can be used for just about anything, whether travel or home improvement. In the case of a reverse mortgage, it’s not necessary to make payments against the loan until it comes due. This basically means you pay the money back when you move, sell the property, or pass away. At the end of the loan term, you might have less equity in your home.
A reverse mortgage it’s a good option for retirees, especially those who don’t qualify for HELOC (home equity line of credit. The income doesn’t affect OAS (Old Age Security) or GIS (Guaranteed Income Supplement) benefits that you might be receiving. Most importantly, you can use the equity in your home to improve your standard of living.
Attention needs to be paid to the fact that there are many businesses in this sector of activity, yet their terms differ. Study the offers carefully and enhance your understanding of the subject. It’s recommended to compare options and ask questions before settling for a provider. Identify the company with the lowest interest rates and fees. Make sure to ask the lender what can cause you to default on the loan and what penalties you have to pay if you sell the home within a certain timeframe. Equally, you should inquire what happens if it takes your estate longer than the stated period of time to repay the loan.
Another idea for a house-rich cash-poor retirement
Getting on the path towards retirement comes with many decisions. It’s important to budget for unexpected emergencies, besides insurance, maintaining the house, or replacing major appliances. A lack of sufficient money means that you need to scale back on your lifestyle or even downsize. Many seniors take part-time jobs just to be able to make ends meet. If you don’t have cash on hand to stay afloat, you might want to try the following solution: ask your kids for financial help. After having assisted family members for long periods of time, it only seems normal to look down on your loved ones for financial help.
If your children can afford to, they can cover some of your living expenses. This way, you won’t have to sell the home and move. Plus, you’ll stop worrying about money. Make sure that other family members are aware of this arrangement so that they’re not surprised or manifest resentment. This is the first time and a rare instance that you’re asking for money. You’re not demanding money because of unhealthy spending habits. The kids are the core of your support team. If you want, you write a loan agreement that clearly states the details of the loan.
Needless to say, you shouldn’t become a financial burden for your loved ones. Careful planning is key to accomplishing that. The lines between adults and children shouldn’t be blurred. As discussed earlier, you can use the wealth accumulated in your property to finance retirement. In this time of strong real estate prices, it’s an option worth considering. A reverse mortgage provides a lump sum of money. Make sure to think it through before reaching a final decision. Reach out to a financial advisor and get independent advice. They will recommend the best option.