Accessing home equity or borrowing money after retirement may seem stressful, but it doesn’t have to be. Some lenders may be willing to loan you money, even if you only receive a pension or other sources of income outside of a traditional salary. There are also non-loan options for accessing equity.
Keep reading to learn more about home equity options for retirees commonly turn to when they need money, along with an option worth considering if you’re a homeowner with substantial equity and you want to access home equity without talking debt.
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What Are the Options Available for Pensioners?
Contrary to popular belief, there are several loan options available for pensioners. When you apply, lenders will generally focus on your credit score and the amount of your pension. If you have other sources of income, the lender could review those as well.
Assuming your income is enough to cover the monthly loan payments and you have good or excellent credit, you will likely have good approval odds. Consider using the lender’s online pre-qualification tool (if available) to gauge your chances of being approved for a loan. Doing so does not impact your credit score and will let you know if you should move forward with an application or explore other options.
Quick note: you could have trouble getting approved for a loan if you’re over 75 years of age. Be sure to ask the lender if there’s an age cut-off for applicants before you apply.
There are also non-debt options for accessing home equity that we will cover further down in this article.
5 Ways to Get Cash If You Are Retired
Here are five common sources to get cash with a loan or from your home if you’re retired:
1. Unsecured Loans and Lines of Credit
Many retirees return to unsecured loans and lines of credit to secure funds. Unsecured loans are disbursed in a lump sum and payable in equal monthly installments over three to five years. Lines of credit are slightly different as proceeds are placed into an account, and you can make withdrawals up to the limit during the draw period. You’ll also make interest-only payments on the amounts you withdraw during this time. When the draw period ends, you’ll repay the outstanding balance in equal monthly payments.
These products are ideal if you’re looking for a small loan or want access to a pool of funds that you can withdraw from for a set period.
Quick note: if you want to take out a secured loan, you’ll need to put up an asset as collateral. If you fall behind on payments, the lender could seize your asset and sell it off to recoup their losses.
2. Reverse Mortgage Loans
If you take out a reverse mortgage, you will receive the loan proceeds in a lump sum that’s equivalent to your home’s value. Some lenders will also disburse loan proceeds through monthly payments for a set term. The loan must be repaid when the home sells or the owner passes away.
Consider steering clear of reverse mortgage loans as they can result in the forfeiture of the inheritance your heirs could receive.
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3. Cash-Out Refinance Loans
A cash-out refinance loan replaces your existing home loan with a new one that includes the equity you pull out. To illustrate, assume your home is worth $420,000 and you owe $320,000. If you pull out 20 percent of your equity ($420,000 – 320,000 * 20 percent) or $20,000 through a cash-out refinance, the balance on your new mortgage will be xxx. Consequently, you’ll have a higher monthly payment, and the interest rate could be higher than what you received with your initial mortgage.
You generally want to consider this option if the interest rate is better than what’s offered for a home equity loan or HELOC.
4. Home Equity Loan or HELOCs
You can unlock the appreciation in your home with a home equity loan or home equity line of credit (HELOC). Most traditional banks, credit unions, and online lenders allow you to borrow between 80 and 85 percent of your home’s value (minus your outstanding mortgage balance). So, if your home is worth $375,000 and you owe $295,000, you could potentially get approved for $68,000.
The disbursement of funds varies between the loan products, though. When you get approved for a home equity loan, the lender disburses the funds to you in a lump sum, and you’ll make monthly principal and interest payments over a set period.
But if you get a HELOC, the funds are placed in an account. You can make withdrawals at any time during what’s known as a draw period. Interest-only payments are made during the draw period. When it ends, you’ll make both principal and interest payments when the draw period ends.
Also, know that the home equity loan or HELOC is secured by collateral. So, if you don’t make payments, your home could be at risk of foreclosure.
5. Shared Home Equity Agreement
Unlike the other options listed, a shared home equity agreement is not a loan. Shared home equity agreements, or “co-investments,” provide homeowners with a lump sum of cash in exchange for a share of the future change in the value of your property. You won’t make monthly payments, and the co-investment amount plus a share of the change in value is payable once you sell the home or the contract ends. One of the companies offering home co-investments is Unison.
Access Your Home Equity Without a Loan in Retirement
If you’re having trouble getting approved for a loan or want to get cash out of your home without racking up more debt, Unison HomeOwner could be a good fit. It’s a shared equity program that allows you to access up to 17.5 percent of your home’s value, and co-investment amounts range between $30,000 and $500,000.
You’ll need a middle FICO score of 620 or higher to qualify. The required debt-to-income and loan-to-value ratios will depend upon your credit rating. The funds can be used to pay off high-interest debts, fund home improvements, retire early, or accomplish other financial goals. And when the agreement ends (after 30 years), or you sell your home, Unison will get the amount of the original co-investment plus their share of the home’s increase in value. If your home value has declined, in most cases, Unison will share in the losses. You can also buy out Unison after five years have passed.
Get started with Unison by visiting their website and using the online pre-qualification tool to see if your home is eligible for Unison HomeOwner and you potentially qualify for a co-investment.
Quick note: If you pass away before the contract ends and a surviving party isn’t listed on the agreement, your estate or heirs will be responsible for settling the contract. Unison grants a 180-day grace period to heirs, or whoever will handle your estate.