Many retirees fret about financial security, but those with accumulated equity can find peace of mind by tapping into it in one of two ways. Reverse mortgages and home equity loans both work well to provide retirement income.

As the baby boomer generation hits retirement age, many 60-something homeowners worry about how to provide a reliable and constant source of income for themselves. While most feel secure about their housing situation, and many have paid off their mortgages in full, they're less confident about where they'll get funds to cover day-to-day budgets or major expenses, like medical care.

Nearly two thirds of all retirement age Americans believe that they'll remain in their present home, rather than moving and selling. What homeowners nearing their sunset years may not understand, however, is how to leverage the asset of their primary residence into a source of steady fixed income. Noted personal finance experts recommend that they explore the possibility of turning their homes into cash cows by using either a home equity loan, or a reverse mortgage.

Leveraging with a home equity loan

A home equity loan works like other consumer loans, except that the collateral that secures it is your property. That bodes well for older Americans who don't owe any money on their homes, because even modest and average single-family homes are generally worth a quarter of a million dollars or more. Average homes in more popular, high demand regions of the country-like California, for example-can be worth many times that much, as can homes that owners have improved over the years through add-ons and upgrades. A retiree can go to a bank or mortgage company and apply for a loan based on the current market value of his property. At closing they'll walk away with a significant amount of cash. It's even possible to roll the closing costs into the principal of the loan to pay it back gradually over time. While home equity loans need to be repaid, a homeowner can use a portion of the loan to make those payments. If the equity is reinvested in stocks or bonds that offer a healthy yield, that extra income can help defray the cost of servicing the payback.

Benefits of a reverse mortgage

The other option may be even more attractive and cost effective. The reverse mortgage is, in essence, a cash advance based on the value of the home. By taking out a reverse mortgage, a homeowner receives monthly payments from the mortgage company, without having to pay the lender a penny. Funds can be taken in a lump sum, through regular monthly payments, as a line of credit, or through a combination of these options. Best of all, the homeowner can't be forced to sell his home or move. Even if the home loses market value, the retiree is safe, because the mortgage lender has to suffer the loss and continue to make payments.

Published on February 15, 2008