Hatching your real estate nest egg
By Lisa Scontras
Real estate investment and strategies are often linked to wealth building and retirement, commonly in the form of rental income or equity building.
For those who can afford to own rental properties, it’s possible the monthly income generated from rent may provide an additional income stream during those golden years.
But for most, the only property they own is the one they live in. Conventional wisdom holds that paying off your mortgage before retiring should be a top priority. This may not always be the best course.
“The older generation likes to pay off their mortgage so that it is free and clear,” said Roland Shar, branch manager at Paramount Residential Mortgage Group.
Psychologically, the idea of being mortgage free, or completely debt free, offers soon-to-be retirees peace of mind, with the knowledge they will always have a roof over their head. But for more than 10 years, mortgage interest rates have been below 5 percent, which is changing how some feel about that mortgage balance. If, for example, you have mortgage with 3.5-percent interest, you may consider keeping the loan rather than depleting your investments or cash reserves to pay it off.
“The problem with paying off your mortgage is that you could be sitting on a million-dollar home,” Shar said. “What happens if, all of a sudden, you need money? My advice to those people who own their home and are looking to retire shortly is to come in and talk with a loan officer about opening up a home equity line of credit (HELOC), preferably five years before retirement. This will give you the option of tapping into your equity, if at some point that’s necessary.”
He added that with a HELOC there are usually no points or fees, and no interest (payments) until you decide to draw on the loan. “The best time to apply for a loan is while you’re still working,” Shar said. “After you retire, your income will likely drop, making it more difficult to qualify.”
Downsizing can be another option to access equity. “We see a lot of people downsize to a condo for easier living,” said Shar. “Sometimes, there is a way to keep the old property, using the rental income to pay the new mortgage.”
It is best to work with a loan officer or financial planner who will crunch the numbers so that you know what percentage of the proceeds should be put toward a replacement home, and how much needs to be socked away to fund retirement.
To reduce retirement expenses and better match retirement income, consider refinancing your current mortgage. Contact your lender to see if they are willing to re-calculate your current loan balance, spreading out the remaining principal over a new 30-year loan term.
It’s never too early to work with a professional financial planner. “Put together your panel of experts,” Shar added. “Include a financial, tax, insurance, CPA, and estate planner who can give you feedback and help you to develop a plan.”