Home is where the heart is and a lot of your money, too.
The kids are gone, retirement is on the horizon, or for a number of other personal reasons, you may be at a point in your life where you’re looking to unlock the equity you’ve built in your home over the years. Let’s look at three popular strategies for making that happen.
Reverse mortgage This is a mortgage secured by the equity in your home but unlike a regular mortgage you do not have to make principal or interest payments — a reverse mortgage pays you.
Generally available only to those over 55 years of age, a reverse mortgage allows you to receive up to 50 per cent of the value of your home and you can choose how you want to receive the money, either as a lump sum, in monthly payments, or a combination of the two.
The money is tax-free, you keep ownership of and all remaining equity in your home but the full amount of the reverse mortgage comes due when you sell your home or move out.
Home equity line of credit (HELOC) This is a relatively new cash management option that allows you to combine your mortgage, loans, line of credit, and chequing and savings accounts into a single line of credit based on the equity in your home.
With a HELOC, you can access up to 80 per cent of the value of your home (reverse mortgages are capped at 50 per cent) and take any amount of money (up to your approved limit) on your own schedule.
Many financial institutions offer this HELOC option: You deposit money in your HELOC account (your paycheck, for example) and take money when you need it to cover day-to-day expenses or for any other reason. Any unused money from your deposits is applied to your loan principal, reducing the loan balance and minimizing interest charges.
Downsizing With the kids gone, your home may seem too big. You can replace it with a smaller one at a lower price, move to a cottage (if you have one) or by renting and using the difference to augment your income, invest for regular returns, or pay down debt.
There are pros and cons to each of these equity-liberating options. Ultimately, choosing the right one for you will depend on your financial situation and the lifestyle you want now and in retirement. Your professional adviser can help you make the best choice for your situation as it is today and as you want it to be tomorrow.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.
