By Sahil Gupta
Anyone close to retirement is concerned about the current economically uncertain times. On top of that, many retirees are buried in debt. According to data from the Federal Reserve Bank of New York, the total debt burden for Americans over age 60 is $3.24 trillion. Debt not only endangers the ability to create steady cash flow in retirement, it can cause undue stress and undermine your ability to enjoy these years.
Debt during retirement is extra burdensome. When you’re on a fixed income there is little wiggle room when it comes to making monthly payments. You are no longer in a position where you have decades to earn income to pay down debt. That said, there is an often overlooked option to create cash flow: tapping into home equity.
U.S. homeowners are sitting on $10 trillion of home equity wealth. On average, 70% of their net worth is tied up in equity. In the first half of 2020 alone, U.S. home equity grew by $620 billion. The good news for those planning for retirement: If you’ve lived in your home for some time, you may be sitting on substantial wealth in the form of home equity. Retirees are often in the best possible position to create much needed cash flow from their largest asset.
Home equity can be a solution for those in retirement looking to free up cash resources. It also can be a smart way to pay down high interest debt, create a cash reserve, tackle medical bills or fund a small business as you’re making long-term plans for retirement.
Those who want to access home equity without having to sell their home or take more mortgage debt now have several options, including a more recent innovation.
Home Equity Loans
A home equity loan offers a fixed interest rate and term, using your home equity as collateral. Lenders often take a number of factors into consideration including your combined loan to value ratio, the appraised value of your home, and your own credit history. Some homeowners like this option because they can accommodate fixed monthly payments and the additional debt burden.
However, an increasing number of homeowners have found lenders have tightened their criteria and are unable to qualify. Recent data from Equifax shows only 270 home equity loans originated nationwide in the week of June 21, 2020 compared to 27,620 a year ago.
Although this option can help access much needed funds, it is still an additional form of debt, and places the burden of monthly payments on retired homeowners.
A reverse mortgage is a loan restricted to people 62 or older that allows homeowners to borrow against their equity in the form of a lump sum cash-out up-to 40% of lien to value. With a reverse mortgage, the interest rate is baked into the pricing and the monthly payments accrue on the balance of the home-equity. There are certain disadvantages with such a solution, such as hefty fees and high interest rates. Since the loan becomes due when you either die or decide to sell off the home, this option could create a financial burden for family members, should you decide to leave the property to them.
Home Value Investments
In recent years a new non-debt alternative has arrived: Home Investment Partnership, also referred to as home equity sharing. In fact, I founded my company, Noah.co, to ensure homeowners have a better alternative to access their hard-earned home equity.
As a homeowner, you can qualify in a few minutes and access up to $350,000 of your home equity. Unlike a home equity loan, there are no monthly payments or interest over the period of the investment–typically 10 years. The amount you owe at the end of the term is based on your home value, whether it has gone up or gone down. This means we share the risk of home value with you -- there’s no chance that the amount of the loan will end up being more than the home is worth. In fact, if the home value drops over time, you will pay back less than what you received upfront. At the end of the term, you can buy out the investment through a variety of options such as refinancing, selling, or by paying out of savings.
If you have a less than stellar FICO score and high-cost debt, a home value investment is an ideal solution. On average, 69% of homeowners we’ve worked with use their home equity investment to pay down debt and reduce their ongoing monthly payments. In total, we’ve helped eliminate more than $10 million in high interest debt. The median improvement in credit score for a Noah partner is + 20 points.
In addition to getting the upfront payment-free funds from Noah, homeowners also get access to a variety of ongoing services. For example, Noah provides ongoing notifications about property taxes, homeowner insurance, pending liens to homeowners. In case of emergency, homeowners may also access additional funds via Noah to take care of home related expenses and mortgage.
Home Investment Partnerships have come into existence through the emergence of companies such as Noah, Unison, and others. Home Investment Partnership companies have earned strong praise by the press and homeowners alike. Collectively, we have served thousands of owners across the country and invested in over $5 billion of real estate.
If you’re a homeowner approaching or in retirement, don’t overlook the opportunity to tap your home equity to increase your cash flow and help pay down debt. Eliminating debt can mean peace of mind if you’re already retired and, if you’re planning for retirement, it can make a difference in how quickly you can do it without having to sell your home. I’m proud to be a part of making more options available.
About the author: Sahil Gupta
Sahil Gupta is the founder of Noah (previously Patch Homes) which partners with homeowners to unlock their home equity and help them build the life they want, without the burden of debt or additional monthly payments. Noah is redefining traditional finance products, a passion Sahil cultivated by working in product development and strategy at Motif Investing, Sliced, and Mellon Capital, a $400 billion investment firm managing investments for large pensions and endowments. He holds a master’s in Computational Finance from Carnegie Mellon’s Tepper School of Business and a bachelor’s in Electronics Engineering from Sardar Patel University.
Noah is not a lender, we are a home investment partner. As such, we are licensed by the California Department of Real Estate as a broker. Although we are not a lender, we are self-compliant with Equal Opportunity Housing and Fair Credit Reporting Act (FCRA.)